MASTER 
NEGATIVE 

NO.  95-82503 


12 


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Author: 


Frederick,  Karl  T. 


Title: 


The  trust  receipt  as 
security 

Place: 

New  York 

Date: 

[1922] 


MASTER    NEGATIVE   # 


COLUMBIA  UNIVERSITY  LIBRARIES 
PRESERVATION  DIVISION 

BIBLIOGRAPHIC  MICROFORM  TARGET 


ORIGINAL  MATERIAL  AS  FILMED  -    EXISTING  BIBLIOGRAPHIC  RECORD 


Business 


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The  Trust  Receipt 
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AMERICAN  ACCEPTANCE  COUNCIL 


120  Broadway 


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'^  *^        THE  TRUST  RECEIPT  AS  SECURITY 

^  I 

yu  v»  In  the  typical  case,  the  trust  receipt  comes  into 
%  tsi  existence  in  the  following  way:  An  importer  R, 
for  example,  who  wishes  to  procure  silk  from  China 
for  manufacture  or  sale  in  this  country,  requests 
his  bank  to  issue  a  letter  of  credit  authorizing  A  B 
&  Company  in  China  to  draw  their  drafts  upon 
the  bank  for  the  cost  of  the  silk  to  be  supplied  by 
them.  This  credit  is  either  delivered  to  the  im- 
porter, or  sent  direct  to  A  B  &  Company,  or  trans- 
mitted through  a  second  institution  located  near  A 
B  &  Company,  and,  as  a  condition  of  its  issue,  the 
importer  signs  an  agreement  with  the  bank  on  the 
following  lines:  In  consideration  of  the  issue  of 
the  credit,  the  customer  agrees  to  repay  to  the  bank 
all  amounts  which  may  be  paid  out  by  it  under  the 
credit,  together  with  interest,  commissions,  etc.,  and 
also  agrees  substantially  as  follows: 

**Your  bank  shall  remain  owner  of  all  said  mer- 
chandise, of  all  policies  of  insurance,  and  of  all  bills 
of  lading  and  other  documents  of  title  thereto  and 
of  the  proceeds  thereof  until  the  payment  as  above 
promised,  and  also  the  payment  of  all  other  sums 
that  may  be  or  become  due  by  us  to  your  bank. 
Upon  receipt  from  you  of  the  possession  of  the 
said  merchandise  shipped  under  such  credit,  or  the 


f 


bills  of  lading  or  other  documents  of  title  thereto, 
we  will  sign  and  deliver  a  receipt  therefor  in  such 
form  as  you  may  require  and  will  give  such  secur- 
ity as  you  may  demand,  and  the  said  merchandise, 
after  delivery  of  the  custody  thereof  to  us  and  the 
proceeds  thereof,  if  sold  by  us,  shall  be  held  sub- 
ject to  your  order  on  demand  as  your  property, 
with  authority  to  take  possession  of  and  dispose  of 
same  at  any  time  by  public  sale  or  otherwise  for 
your  reimbursement  or  protection,  and  to  charge  all 
expenses,  including  commissions  for  sale  and 
guaranty,  the  bank  being  free  from  all  responsibility 
whatever  in  respect  to  such  sale/* 

A  B  &  Company  then  ship  the  silk  in  accordance 
with  directions,  taking  the  bill  of  lading  to  the  order 
of  the  bank  "notify  R."  Insurance  is  also  effected, 
loss,  if  any,  payable  to  the  bank.  The  seller  then 
draws  its  draft  upon  the  bank  for  the  cost  or 
purchase  price  of  the  shipment,  attaches  to  it  the 
bill  of  lading,  policy  of  insurance,  consular  invoice 
and  any  other  necessary  papers,  and  forwards  the 
draft  through  banking  channels  for  payment.  In 
many  cases,  A  B  &  Company,  upon  exhibiting  the 
letter  of  credit  at  their  own  bank,  obtain  advances 
upon  or  in  anticipation  of  the  draft. 

The  draft  in  due  course  is  presented  to  the  bank, 
upon  which  it  was  drawn,  and  is  paid.  It  will  be 
observed,  in  connection  with  the  foregoing,  that 
title  to  the  silk  was  not  at  the  outset  in  the  importer 
and  that  it  has  never  been  transferred  to  him. 
Physical  possession  and  control  of  the  silk  likewise 


» 


have  not  been  his  and  are  not  given  to  him.  These 
are  highly  important  facts  in  our  later  discussion. 

In  due  time,  the  importer  is  advised  of  the  arrival 
of  the  shipment.  He  goes  to  the  bank,  states  this 
fact  and  expresses  a  desire  that  the  goods  be  en- 
tered at  the  customhouse  and  placed  in  warehouse. 
The  bank  accordingly  hands  the  bill  of  lading  and 
other  shipping  documents  to  him  upon  his  signing  a 
trust  receipt  ^  for  this  purpose.  The  importer  has 
not,  up  to  this  time,  reimbursed  the  bank  for  the 
amount  paid  by  it  upon  the  draft  with  agreed  com- 
missions and,  under  the  arrangement,  it  is  not  con- 
templated that  he  shall  do  so  until  a  later  time.  If 
he  should  do  so  at  once,  no  occasion  for  the  use  of 
a  trust  receipt  would  be  presented.  It  is  the  intention 
of  the  parties,  therefore,  that  the  bank  shall  retain 
its  hold  upon  the  silk  as  security  until  such  payment 
IS  made. 

The  entry  and  warehousing  of  the  silk  having  been 
accomplished  in  the  name  of  and  as  the  property  of 


*  This  may  read  as  follows :  "Property  in  Trust.  Received  from 
the  X  Bank  the  merchandise  specified  in  the  bill  of  lading  per 
S.  S.  Juno,  the  property  of  the  X  Bank,  viz.,  100  Bales  Raw  Silk 
marked  A.  B.,  imported  under  the  terms  of  their  letter  of  credit 
No.  200,  issued  for  our  account,  the  said  bill  of  lading  to  be  used 
by  us  for  the  sole  purpose  of  entering  the  above  described  property 
at  the  United  States  Customs  House  of  the  Port  of  New  York,  and 
of  immediately  storing  the  same  in  the  name  and  as  the  property  of 
the  said  X  Bank,  and  subject  only  to  their  order,  we  hereby  agree- 
ing to  so  store  the  said  property  and  to  hand  the  storage  receipt 
for  same  to  the  said  bank  when  obtained.  We  also  agree  to  fully 
insure  said  property  against  fire,  the  loss,  if  any,  payable  to  the  X 
Bank,  and  to  hand  the  policies  of  insurance  thereon  to  the  said 
X  Bank. 


[Signed] 


t» 


I 


4 

I  Hiltffl' 


the  bank  as  agreed  in  the  trust  receipt,  the  importer 
hands  the  warehouse  receipts  and  insurance  to  the 
bank,  and  the  trust  receipt  is  canceled.    The  entry 
and  warehousing  have  been  accomplished  in  the  same 
manner  and  with  the  same  effect  as  if  the  bank  had 
sent  its  own  messengers  or  brokers  to  accomplish 
them.    It  has   simply  saved  this  expense,  which 
would  be  chargeable  to  the  importer,  and  avoided 
this  trouble,  by  availing  itself  of  the  assistance  of  the 
importer,  who,  as  will  readily  be  observed,  is  in- 
terested in  seeing  that  they  are  properly  attended 
to  and  who  can  save  some  expense,  by  himself  per- 
forming these  incidental  functions. 

It  may  happen  that  the  importer  R  has  already 
found  a  purchaser  for  the  silk  at  the  time  of  its 
arrival,  who  is  to  pay  either  cash  or  on  some  agreed 
terms  of  credit,  such  as  notes  or  acceptances.  In 
that  case  there  will  be  no  occasion  for  warehousing 
the  goods  and  consequently  this  first  form  of  trust 
receipt  may  never  be  used. 

In  any  case,  the  next  step  is  likely  to  be  as  fol- 
lows :  R  advises  the  bank  that  P  is  prepared  to  buy 
the  silk  and  requests  the  bank  to  permit  him  to  make 
the  sale.  The  bank  accordingly  hands  him  either 
the  bill  of  lading  or  the  warehouse  receipt,  as  the 
case  may  be,  receiving  in  return  a  trust  receipt  in 
slightly  different  form.*        

•"Property  in  Trust.  Received  from  the  X  Bank  the  merchan- 
dise spedfied  in  the  bill  of  lading  per  S.S.  Juno,  tl"  P^pertf. «* 
die  said  X  Bank,  viz.,  100  Bales  Raw  Silk  marked  A.  B.,  imported 


hL 


% 


R  thereupon  delivers  the  silk  to  P,  the  purchaser, 
who  in  most  cases  is  not  informed  as  to  the  interest 
of  the  bank  in  the  transaction.  R  collects  the  pro- 
ceeds and  turns  them  over  to  the  bank  as  provided 
in  the  trust  receipt.  The  bank  pays  itself  in  full 
with  charges  and  interest,  and  credits  to  R's  account 
any  balance  remaining.  The  trust  receipt  thereupon 
is  cancelled  or  returned ;  at  any  rate,  it  is  exhausted 
and  the  transaction  is  closed.  R,  by  the  use  of  this 
machinery  has,  without  the  use  of  a  dollar  of  his 
own  money,  made  an  importation  of  silk  from  China, 
sold  it  to  a  domestic  consumer,  and  received  his 


under  the  terms  of  their  letter  of  credit  No.  200  issued  for  our 
account,  the  said  bill  of  lading  to  be  used  by  us  for  the  sole  purpose 
of  obtaining  possession  of  above  merchandise,  and  delivering  the  same 
to  P  who  have  purchased  the  same  for  cash/notes  payable  in 

and  to  obtain  from  the  purchasers  the  proceeds  of  the  sale 

of  the  same.  .       .,  ,      j.       . 

"In  consideration  of  the  delivery  of  said  merchandise  to  us  in 
trust  as  above,  we  agree  to  deliver  it  immediately  to  the  said  pur- 
chasers, and  to  collect  the  proceeds  of  sale,  and  immediately  deliver 
such  proceeds  to  the  X  Bank,  in  whatever  form  collected,  to  be 
applied  by  them  against  the  acceptances  of  the  X  Bank,  on  our 
account,  under  the  terms  of  letter  of  credit  No.  200  issued  for  our 
account  and  to  the  payment  of  any  other  indebtedness  of  ours  to 
the  X  Bank.  It  is  understood,  however,  that  if  such  proceeds  be 
in  notes  or  bills  receivable,  they  shall  not  be  so  applied  until  paid, 
but  with  liberty  meanwhile  to  the  X  Bank  to  sell  or  dscount  and 
BO  apply  net  proceeds. 

"The  X  Bank  may  at  any  time  cancel  this  trust,  and  they  may 
take  possession  of  said  goods  until  the  same  have  been  delivered 
to  said  purchasers  and  the  proceeds  of  sale  received  from  them, 
and  thereafter  of  such  proceeds  wherever  the  said  goods  and  pro- 
ceeds may  then  be  found,  and  may  collect  the  proceeds,  and  in  the 
event  of  any  suspension  or  failure  or  assignment  for  the  benefit  of 
creditors  on  our  part,  or  of  the  non-payment  at  maturity  of  any 
obligation  or  acceptance  made  by  them  under  said  credit,  or  any 
other  credit  issued  by  the  X  Bank,  on  our  account,  or  of  any 
indebtedness  on  our  part  to  them,  all  such  obligations  and  acceptances 
and  all  indebtedness  shall  thereupon  (with  or  without  notice)  be- 
come due  and  payable. 


[Dated] 


[Signed] 


f 


profit  from  the  transaction,  but  at  no  time  has  he 
held  the  title  to  any  part  of  the  silk.    Nevertheless, 
he  has  occupied  the  position  of  a  principal ;  he  has 
never  been  a  mere  broker,  factor  or  agent.    He  has 
assumed  the  primary  risk,  and  his  credit  with  the 
bank  and  his  business  initiative  have  made  the  trans- 
action possible.    No  one  has  a  claim  to  any  share 
of  his  profits.    The  bank,  on  the  other  hand,  has 
obviously  intended  to  do  the  business  on  a  secured 
basis;  it  has  intended  to  obtain  the  title  and  le^l 
control  over  the  goods  at  the  outset  and  to  retain 
them  until  they  finally  pass  to  P,  the  ultimate  pur- 
chaser, but  it  has  no  further  interest  in  the  silk 
beyond  the  repayment  of  its  advances  and  charges. 
The  title  is,  therefore,  solely  a  security  title,  though 
during  part  of  the  time  divorced  from  physical  pos- 
session which  is  entrusted  to  the  person  principally 
interested,  namely,  the  importer.    We  shall  proceed 
to  examine  the  nature,  validity,  extent  and  limita- 
tions of  this  security  arrangement. 

Before  doing  so,  another  form  of  the  transaction 
should  be  noted.  The  importer  may  be  a  manufac- 
turer of  silk,  and  may  desire  to  obtain  possession  of 
the  imported  raw  material  for  the  purpose  of  chang- 
ing its  form  and  increasing  its  value  by  the  applica- 
tion of  labor,  before  offering  it  for  sale.  He  may 
intend  to  accomplish  these  purposes  by  combining  it 
in  various  proportions  by  the  application  of  labor 
with  other  constituent  materials,  thus  producing  the 

8 


^ 


" 


■■■■^- 


i 


manufactured  goods  for  sale.  Or  he  may  desire 
merely  to  sell  as  opportunity  offers.  In  any  such 
case,  he  may  obtain  the  silk  from  the  bank  by  signing 
a  trust  receipt  which  varies  from  the  foregoing  in 
that,  instead  of  authorizing  a  sale  to  a  named  buyer, 
it  states  that  the  property  is  delivered  to  the  im- 
porter to  hold  as  the  property  of  the  bank, 

«  ^ith  liberty  only  to  manufacture  or 

to  sell  the  'same,  manufactured  or  unmanufactured, 
accounting  for  the  proceeds  to  the  said  Bank,  but 
without  liberty  to  pledge,  until  all  bills  of  exchange 
drawn  for  our  account  on  the  said  Bank^  shall  have 
been  paid  or  satisfactorily  provided  for." 

It  also  contains  provisions  regarding  insurance,  etc. 
In  such  a  case,  the  manufacturer  is  expected  to  turn 
over  the  proceeds  of  sale  to  the  bank  as  and  when 
received.  As  soon  as  the  advances  made  by  the  bank 
are  paid  in  full  with  charges  and  interest,  it  regards 
the  trust  receipt  as  satisfied  and  makes  no  further 
claim  upon  the  silk  or  its  products,  regardless  of 
whether  or  not  the  proceeds  of  the  entire  shipment 
have  been  delivered  to  it.  This  fact  again  indicates 
the  strictly  security  nature  of  the  arrangement. 

It  is  also  not  uncommon  for  the  banker  to  deliver 
documents  or  goods  against  trust  receipt  for  the 
purpose  of  enabling  the  signer  to  make  shipment 
to  a  distant  buyer  and  to  obtain  bill  of  lading  there- 
for which  he  is  thereupon  to  hand  to  the  bank. 

In  the  foregoing  sketch,  we  have  assumed  an  im- 


%. 


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i 


portation  of  goods  from  abroad.  It  is  obvious  that 
the  trust  receipt  might  equally  well  be  used  in  con- 
nection with  a  domestic  transaction,  such,  for  ex- 
ample, as  a  shipment  of  automobiles  from  a  manu- 
facturer in  Detroit  to  a  customer  in  Philadelphia. 
The  railway  bill  of  lading  may  be  taken  or  endorsed 
to  the  order  of  a  bank  in  Philadelphia,  which  has 
agreed  to  honor  drafts  for  the  purchase  price  and, 
upon  arrival,  the  automobiles  may  be  turned  over  for 
sale  on  the  security  of  a  trust  receipt  given  to  the 
bank  by  the  customer.  Such  use  of  the  trust  receipt 
is  by  no  means  infrequent,  but  its  most  extensive  use 
is  in  connection  with  importations  from  abroad. 

II 

The  various  forms  of  collateral  security  may 
generally  be  classified  under  the  headings:  pledge, 
conditional  sale,  or  mortgage.  The  trust  receipt 
does  not  on  its  face  or  by  its  name  purport  to  con- 
form to  any  of  these  types.  Obviously,  a  bailment 
of  goods  takes  place — a  delivery  of  possession  with 
an  intention  to  retain  the  title  or  at  least  certain 
rights  akin  to  title.  The  use  of  the  word  "receipt" 
suggests  a  recognition  of  this  fact.  The  word 
"trust,"  however,  raises  further  question.  An 
equitable  trust  requires  a  trustee ;  the  document  re- 
cites that  the  goods  are  received  "in  trust,"  thus 
indicating  the  notion  that  the  sig^ner  is  a  "trustee" 
for  the  benefit  of  the  bank.    This  involves  the  hold- 

10 


ing  of  the  so-called  legal  titie  by  the  trustee  for 
the  benefit  of  a  cestui  que  trust  who  has  no  legal 
title  but  rather  certain  beneficial  interests  cogniz- 
able in  equity.  This  relation  is  entirely  contrary 
to  the  expressed  intention  of  the  instrument  which 
clearly  stipulates  that  title  of  "the  property"  shall 
at  all  times,  as  between  the  parties,  remain  in  the 
bank.  We  must  conclude,  therefore,  that  the  word 
"trust"  contains  a  fiduciary  relation  or  perhaps 
merely  a  contractual  obligation  respecting  the  prop- 
erty. The  equitable  law  of  trusts  will  not  provide 
the  answer  as  to  the  nature  of  the  arrangement  or 
the  rights  of  the  parties. 

The  arrangement  does  not  constitute  a  pledge. 
The  security  of  a  pledge  depends  entirely  upon  pos- 
session in  the  party  secured.  When  possession  is 
lost,  the  security  is  lost.  The  title  in  the  case  of  a 
pledge  is  assumed  to  be  in  the  pledgor  or  at  least  in 
another  than  the  pledgee.  This  is  exactly  contrary 
to  the  trust  receipt  situation,  where  the  title  is  in- 
tended to  remain  in  the  party  secured  while  pos- 
session is  entrusted  to  another  who  has  a  certain 
interest  as  yet  undefined  in  the  property. 

Another  form  of  security  which  has  come  to  be 
recognized  either  by  statute  or  practice  is  the  con- 
ditional sale.  A  seller  of  phonographs,  for  ex- 
ample, delivers  a  machine  to  a  buyer  under  a  con- 
tract whereby  payments  are  to  be  made  from  time 
to  time  on  account,  but  with  the  stipulation  that 

11 


:>-  '\ 


I 


title  shall  remain  in  the  seller  until  full  payment 
has  been  completed,  with  the  proviso  that  on  default 
in  any  payment,  possession  may  be  reclaimed  by  the 
seller.  This  arrangement  bears  a  closer  resemblance 
to  the  trust  receipt  than  does  a  pledge.  The  courts 
of  Connecticut  have  even  gone  to  the  extent  of  de- 
fining the  trust  receipt  situation  as  a  conditional 
sale.^  There  are,  however,  real  points  of  differ- 
entiation. In  a  conditional  sale,  possession  cannot 
be  retaken  until  a  default,  whereas  in  a  trust  receipt 
it  can  be  retaken  at  any  time.  In  the  second  place, 
the  bank  is  not  irrterested  in  selling  goods  as  a  busi- 
ness, nor  is  it  immediately  interested  in  the  com- 
mercial value  or  market  for  the  property.  If  it 
retakes  the  goods  and  sells  them  for  an  amount  in 
excess  of  this  sum,  this  excess  belongs  to  the  im- 
porter. But  in  a  conditional  sale,  the  buyer  is  in- 
terested only  in  such  amount  as  he  has  paid  on 
account  of  his  contract. 

But  more  important  than  any  of  these  points  of 
difference  is  the  fact  which  stands  out  clearly  from 
the  terms  of  the  credit  agreement  and  the  trust 
receipt,  that  the  importer  has  no  intention  of  buy- 
ing goods  from  the  bank  and  that  the  bank  has 
no  intention  of  selling  goods  to  him.  The  bank 
has  loaned  him  credit  and  then  advanced  money 
for  his  account.     If  he  does  not  repay  this,  the 

*New  Haven  Wire  Co,  Cases  (1888)  57  Conn.  352,  18  Atl.  266. 

12 


f^i> 


, 


bank  will  sue  him— not  for  damages  for  breach  of 
contract  in  failing  to  buy  and  pay  for  goods— 
but  rather  for  money  loaned.  This  makes  it  clear 
that  the  substance  of  the  transaction  is  a  loan  of 
money  against  security  rather  than  a  contract  for 
the  purchase  and  sale  of  goods  as  between  the  bank 
and  its  customer.  In  so  far  as  goods  are  involved, 
they  bear  a  subordinate  and  collateral  relation.  The 
obligation  of  the  importer  to  repay  the  loan  is  not 
contingent  upon  the  arrival  of  the  goods  or  upon 
their  delivery  to  him.  They  have  been  imported  at 
his  risk  and  had  they  been  lost  or  destroyed  en 
route,  he  would  still  and  to  the  same  extent  have 
been  obliged  to  repay  the  advance.* 

It  remains  to  consider  the  trust  receipt  in  respect 
to  its  relation  to  the  law  of  mortgages.  A  mort- 
gage, whether  of  chattels  or  realty,  historically  is 
a  security  dependent  on  title  as  distinguished  from 
a  pledge  which  rests  upon  possession.  Title  is 
given  to  the  person  secured,  while  possession  may 
be  given  to  the  mortgagor  or  debtor  or  his  repre- 
sentative. 

It  is  almost  universally  provided  in  this  country 
that  a  chattel  mortgage  is  valid  as  against  creditors 
or  bona  fide  purchasers  for  value,  only  if  it  is 
recorded.  Inasmuch  as  it  is  not  the  common  practice 
to  record  trust  receipts,  it  becomes  decidedly  im- 

*  See  In  re  McElheny   (1904)   91  App.  Div.   131,  86  N.  Y.  Supp. 
326. 

13 


portant  to  consider  the  trust  receipt  in  the  light 
of  the  law  of  mortgages.    If  it  be  argued  that  the 
banker  has  a  "lien"  on  some  theory  akin  to  the 
lien  theory  of  mortgage  as  applied  in  various  juris- 
dictions to  real  estate,  it  is  difficult  to  see  how  the 
theory  can  be  reconciled  with  the  facts.'    The  im- 
porter never  had  title  to  the  goods  up  to  the  time 
when  the  bank  made  its  loan  of  credit  or  advance 
of    money.    The    goods    were    the    property    of 
strangers  perhaps  in  China.    They  were  not  the 
agents  of  the  importer  but  were  sellers  of  goods. 
They  clearly  transferred  their  title  to  the  bank  by 
taking  and  delivering  a  bill  of  lading  to  its  order.* 
It  is  quite  impossible  to  say  that  when  they  did 
this   act  they  transferred  title  to  the  importers. 
So  to  hold  would  be  to  overturn  much  of  the  law 
regarding  negotiable  and  semi-negotiable  documents 
of  title  and  would  also  be  to  violate  the  plain  in- 
tention of  the  parties.    The  title  was  at  that  moment 
voluntarily  transferred  to  the  bank  by  the  clear  and 
effective  acts  of  the  parties.    At  that  moment,  the 
rights  of  the  bank  became  fixed.    It  acquired,  not 
a  lien,  but  legal  title.^    The  importer  was  never  in  a 
position  to  grant  either  a  lien  or  title  for  he  has 
never  either  owned  or  controlled  the  property.    The 

•  The  so-called  lien  theory  of  mortgages  does  not  apply  to  chattds. 
Noyes  v.  Wyckoi  (N.  Y.  18S3)  30  Hun  466,  a#'<f,  (1889)  114  N.  Y. 
204.  21  N.  E.  158;  Weeks  v.  Baker  (1890)   152  Mass.  20.  24  N.  E. 

905 

•See  Southern  Flour  &  Grain  Co.  v.  Central   Texas  Exch.  Nat. 

Bk.    (Ga.    1921)    109   S.   E.   685.  .^«  «.  .    ... 

»See  In  re  Liberty  Silk  Co.  (D.  C.  1907)   152  Fed.  844. 

14 


,^ 


seller  has  retained  no  interest  in  the  property,  but 
has  conveyed  his  entire  title  to  some  one  else.  It 
would  be  quite  contrary  to  the  fact  and  to  the 
express  stipulations  of  the  parties  to  say  that  the 
seller,  by  delivering  to  the  bank  a  bill  of  lading 
drawn  to  the  bank's  order,  had  thereby  conveyed 
title  to  the  importer,  but  had  at  the  same  time  given 
a  lien  to  the  bank.  The  bank,  therefore,  prior  to 
the  delivery  of  the  goods  to  the  importer  against  his 
trust  receipt,  is  clearly  the  title  holder — not  a  lien 
holder. 

When  the  bank  delivers  possession  to  the  im- 
porter upon  receiving  the  trust  receipt,  it  is  express- 
ly stipulated  that,  as  between  itself  and  the  importer, 
title  shall  remain  in  the  bank.  By  what  casuistry 
can  it  be  argued  that  this  stipulation  means  exactly 
the  opposite  of  what  it  says?  Can  it  be  said  that 
this  act  gives  title  to  the  importer  and  at  the  same 
moment  retains  a  mere  lien  for  the  bank?  This 
is  neither  what  the  parties  stipulate  nor  what  they 
intend,  and,  as  between  the  parties,  there  is  cer- 
tainly no  principle  of  law  which  makes  it  impos- 
sible for  them  to  accomplish  their  express  purpose, 
or  which  necessarily  implies  the  accomplishment 
of  an  opposite  result.  When  the  rights  of  third 
parties  are  involved,  it  may  very  well  be  that  this 
delivery  may  have  results  not  entirely  consonant 
with  the  intention  of  the  parties,  but  we  are  not  now 
considering  that  situation.     Such  rights  can  hardly 

15 


Km 


affect  the  true  nature  of  the  transaction  as  between 
the  parties. 

It  remains  to  determine  possible  identity  of  the 
trust  receipt  with  a  chattel  mortgage  apart  from 
any  hypothesis  of  "lien."  The  essence  of  a  mort- 
gage may  be  said  to  be  a  conveyance  of  title  to  the 
mortgagee  as  security,  coupled  with  certain  rights 
in  the  property — equitable  in  their  origin — in  the 
mortgagor. 

How  closely  do  the  facts  of  this  arrangement  coin- 
cide with  those  existing  under  a  trust  receipt? 
Title  is  found  in  the  mortgagor  prior  to  the  mort- 
gage. He  conveys  this  title  to  the  mortgagee  as 
security  for  the  performance  of  his  obligation  or 
for  the  obUgation  of  another.  In  the  case  of  a 
trust  receipt  title  has  never  been  in  the  importer  and 
he  consequently  cannot  convey  it  to  the  bank.  It 
may  happen,  however,  that  a  mortgagor  conveys  his 
title  to  the  mortgagee  as  security  for  the  perform- 
ance of  an  obligation  by  a  third  person.®  In  that 
case,  the  equity  of  redemption  belongs  to  him  and 
not  to  the  third  person  and  the  property  reverts  to 
him  upon  the  performance  of  the  obligation  by  the 
third  person.  But  in  a  trust  receipt,  under  no 
circumstances  is  the  title  to  revert  to  the  foreign 
seller.  This  fact,  however,  does  not  prove  that 
there  is  not  a  mortgage.  The  mortgagor  who  has 
conveyed  his  title  as  security  for  the  obligation  of 

•See  Blake  v.  Corbett  (1890)   120  N.  Y.  327,  24  N.  E.  477. 

16 


f   < 


i 


another,  may  readily  convey  his  "equity"  to  the 
third  person  who  owes  the  debt.  That  person  then 
stands  in  the  shoes  of  the  mortgagor,  for  he  has  all 
the  rights  of  the  mortgagor,  although  he  has  never 
held  the  legal  title. 

Is  that  not  exactly  the   situation   which  exists 
in  the  case  of  a  trust  receipt?    An  arrangement  is 
made  by  the  importer  with  the  seller  abroad  looking 
to  the  purchase  of  goods.    This  cleariy  contemplates 
the  acquisition  of  at  least  the  beneficial  interest  in 
the  property  by  the  importer,  subject  to  such  ar- 
rangements  for  financing  as   he  may   make.     He 
directs  the  seller  to  convey  the  legal  title  for  the 
purpose  of  security  to  the  bank  and,  by  necessary 
implication,  to  convey,  at  the  same  moment,  to  him 
—the    importer— the    "equity,"    "equitable    title," 
"equity  of  redemption,"  "residue  of  ownership,"  or 
by  whatever  name  the  rights  of  a  mortgagor  may 
be  known.®     From  that  time  forth,  the  beneficial 
interest  in  the  property  is  his,  subject  to  the  legal 
title  in  the  bank  as  security  for  the  performance 
of  his  obligations  to  it.    Upon  the  performance  of 
those  obligations,  the  legal  title  reverts  or  passes  to 
him  as  the  person  who  has  acquired  and  owns  what 
we  may  for  convenience  continue  to  refer  to  as 
the  "equitable  title."     This  we  submit  is  the  correct 


•See   In   re  Richheimer    (C.    C.   A.    1915)    221    Fed.    16,   22,   23, 
"residue  of  ownership." 

17 


I 


explanation  and  definition  of  the  relationship  which 
exists  between  the  importer  and  the  bank.  It  is 
generically  a  chattel  mortgs^e.  Why,  then,  is  it 
not  so  classified  by  the  cases? 

Our  answer  is  that  there  are  exceedingly  strong 
reasons  why  the  business  should  be  done  and  the 
arrangement  upheld  without  the  necessity  of  record- 
ing the  trust  receipt.  To  record  the  numerous  trust 
receipts  which  are  taken  by  a  bank  having  a  letter  of 
credit  business  of  any  magnitude,  would  be  an  al- 
most intolerable  burden  and  expense.  And  in  prac- 
tice neither  banks  nor  merchants  can  take  the  time 
and  trouble  to  search  the  records  of  the  county 
clerk  in  handling  the  business  of  the  day.  To 
record  a  discharge  of  the  trust  receipt  whenever  it 
has  served  its  purpose  would  again  be  an  intolerable 
nuisance.  Furthermore,  it  is  too  much  to  expect 
buyers  to  search  the  county  clerk's  files  every  time 
they  do  business  with  an  importer.  In  short,  busi- 
ness necessity  renders  recording  entirely  imprac- 
ticable while  at  the  same  time  it  renders  the  use  of 
the  trust  receipt  highly  convenient.  Another  reason 
why  it  should  not  be  classed  with  ordinary  chattel 
mortgages  is  the  simple  fact  that  it  is  not  an  ordinary 
chattel  mortgage.  The  method  of  effecting  sales 
and  carrying  on  business  involving  transfers  of  title 
by  means  of  draft  with  negotiable  bill  of  lading  at- 
tached, to  be  delivered  upon  payment  of  the  draft, 

18 


I 


is  quite  as  old  as  the  recording  acts  relating  to  chattel 
mortgages,  and  it  is  a  practice  equally  old,  for 
bankers  to  make  advances  for  the  payment  of  these 
drafts  upon  the  security  of  the  goods  or  the  docu- 
ments. 

We  have  said  that  this  creates  a  security  which  is 
generically  a  chattel  mortgage.  It  is  perfectly  clear, 
however,  that  the  situation  is  not  one  that  would 
be  recognized  as  a  chattel  mortgage  by  the  man  in 
the  street.  A  chattel  mortgage  as  generally  under- 
stood means  a  conveyance  of  property  by  a  borrower 
as  security  for  his  own  obligation  and  the  policy 
of  the  recording  acts  is  directed  at  the  apparent 
ownership  based  upon  previous  and  continued  pos- 
session by  such  borrower  of  property  which  former- 
ly belonged  to  him.  A  secret  transfer  of  title  by 
such  a  borrower  ought  not  to  be  effective  to  the 
injury  of  creditors  who  have  relied  upon  his  reten- 
tion of  possession.  This  vice  does  not  exist  in  the 
trust  receipt  situation,  for  the  borrower  has  not 
hitherto  had  possession.  In  construing  the  term 
"chattel  mortgage,"  as  used  in  recording  acts,  it  is 
fair  and  proper  to  consider  the  normal,  natural  and 
common  understanding  of  the  meaning  of  the  words, 
and,  thus  construed,  the  trust  receipt  situation  is  not 
a  chattel  mortgage,  in  spite  of  the  fact  that  strict 
legal  analysis  shows  that  it  possesses  the  attributes 
of  that  type  of  security.  This  is  particularly  true 
in  view  of  the  fact  that  the  construction  referred  to 

19 


I 


•M 


I 


is  called  for  by  the  needs  of  business  convenience 
and  commercial  usage.^® 

The  trust  receipt  is,  as  we  say,  distinguishable 
from  the  ordinary  chattel  mortgage.  The  distinc- 
tion is  one  that  exists  in  fact — it  is  real  and  it  is 
clear-cut  and  workable.  This  ground  of  differ- 
entiation is  the  fact  that  title  does  not  pass  to  the 
bank  from  the  importer  but  rather  from  a  third 
person.  The  importer  has  never  held  the  legal 
title.  He  has  arranged  a  purchase  money  mortgage 
to  the  banker,  who  makes  the  loan,  without  himself 
appearing  in  the  chain  of  title.^^  'No  one  is  de- 
ceived by  the  fact  that  the  bank  has  acquired  a 
security  title  which  is  unrecorded,  because  there  is 
no  "retention  of  possession"  by  the  importer.  He 
has  never  had  either  possession  or  title. 

To  state  it  again  the  difference  between  the  true 
trust  receipt  situation  and  the  ordinary  chattel  mort- 
is See    Williston    (1921)    34    Harvard    Law    Rev.    741,    758,    759; 
In    re   Cattus    (C.    C.   A.    1910)    183    Fed.    733;    In   re  Richheimer, 
supra,   footnote  9. 

"  In  re  Shulman  (D.  C.  1913)  206  Fed.  129,  was  a  case  where 
the  owner  attempted  to  give  security  for  his  own  debt,  agreeing  to 
hold  the  property  "in  trust"  for  the  lender.  The  court  said:  "To  • 
make  such  a  sale  or  pledge  effective  delivery  or  its  equivalent  is 
essential.  .  .  .  The  Trust  Receipt  cases  .  .  .  differ  in  this 
vital  fact:  In  those  cases  the  debtor  had  never  acquired  title  to  the 
property  in  question;  the  title  had  always  been  in  some  one  else; 
and  his  creditors  were  not  allowed  to  deal  with  the  property  of  this 
other  person  as  if  it  were  the  debtor's,  although  the  property  had 
come  into  the  debtor's  actual  custody."  In  re  Dunlap  Carpet  Co. 
(D.  C.  1913)  206  Fed.  726,  730-31:  "Much  of  this  trade  could 
hardly  be  carried  on  by  any  other  means,  and  therefore  it  is  of  first 
importance  that  the  fundamental  factor  in  the  transaction,  the 
banker's  advance  of  money  and  credit,  should  receive  the  amplest 
protection.  .  .  .  This  security  is  not  an  ordinary  pledge  by  the 
importer  to  the  banker,  for  the  importer  has  never  owned  the  goods, 
and  moreover  he  is  not  able  to  deliver  the  possession"  (author's 
italics). 

20 


O 


I 

I 


gage  is  the  fact  that,  in  the  trust  receipt,  title 
passes  to  the  bank  (the  mortgagee)  from  the  seller 
of  goods,  as  security  for  the  debt  of  a  third  party, 
while  in  the  ordinary  chattel  mortgage,  title  passes 
to  the  bank  (the  mortgagee)  directly  from  the  party 
owing  the  debt.  Let  us  look  for  a  moment  at  an 
illustration.  If  a  merchant  having  goods  on  hand 
belonging  to  himself  transfers  the  title  to  a  bank 
as  security  for  a  loan,  the  bank  acquires  a  security 
title  as  between  the  parties  and  so  long  as  it  has 
possession  of  the  goods  or  the  documents  of  title 
it  is  safe,  but  if  it  were  to  redeliver  the  goods  to  the 
merchant  or  turn  over  to  him  the  documents  of 
title  upon  his  signing  a  document  worded  in  all 
respects  like  a  trust  receipt,  without  recording  the 
same,  there  can  hardly  be  any  question  that  the 
transaction  would  be  held  to  be  a  chattel  mortgage 
(assuming  it  is  not  a  pledge)  and  that  such  a  trust 
receipt  would  be  valueless  by  way  of  special  se- 
curity.  But,  if  the  merchant  being  about  to  buy 
goods,  directs  the  seller  to  convey  the  title  direct 
to  the  bank  which  advances  the  purchase  price,  and 
if  the  bank  then  delivers  the  goods  to  the  merchant 
against  a  trust  receipt,  the  legal  situation  between 
the  parties  will  be  essentially  the  same  as  in  the 
last  case,  but  the  legal  results  will  not  by  any  means 
be  the  same. 

The  failure  to  recognize  the  distinction  to  which 
we  have  called  attention  has  led  occasionally  to 

21 


I 


I 


the  use  of  the  trust  receipt  in  circumstances  where 
it  cannot  assure  any  special  rights  beyond  those 
secured  by  an  ordinary  contract  or  unrecorded  chat- 
tel mortgage."  To  take  an  example:  A  borrower 
pledges  warehouse  receipts,  negotiable  stocks  or 
bonds,  or  goods  with  a  bank  as  security  for  a  loan. 
Not  infrequently  he  asks,  shortly  thereafter,  that 
the  property  be  returned  to  him  against  his  trust 
receipt  and  sometimes  his  request  is  granted,  pre- 
sumably on  the  supposition  that  the  bank  is  retain- 
ing some  special  security  rights  in  the  property  by 
reason  of  holding  the  trust  receipt.  In  this,  it  is 
entirely  mistaken.  It  has  from  that  moment  no 
security  whatever  which  it  would  not  have  as  holder 
of  an  unrecorded  chattel  mortgage  or  a  mere  con- 
tract. It  may  not,  in  fact,  have  even  that,  if  the 
deposit  was  by  way  of  pledge  rather  than  mortgage. 
It  should  be  remembered  that  security  is  generally 
needed  only  in  time  of  trouble.  However  honest 
the  intentions  of  the  borrower,  if  bankruptcy  in- 
tervenes, the  property  will  be  held  as  part  of  his 
estate  by  the  receiver  or  trustee ;  the  bank  will  not 
be  able  to  recover  it  or  its  proceeds,  but  will  be 

"See  In  re  Gerstman  (C.  C.  A.  1907)  157  Fed.  549;  In  re  Shul- 
mtm,  supra,  footnote  11;  In  re  Demherg  &  Son  (1921)  66  N.  Y. 
L  J  1200.*  This  decision  was  affirmed  and  a  contrary  holding 
upon'  similar  facts  In  re  Fountain  (not  reported  below)  was  reversed 
by  the  C.  C.  A.,  2nd  Circuit  282  Fed.  816.  See  also  In  re  CuUen 
282  Fed  902  (D.  C.  Md.)  American  &  British  Sec.  Co.  v. 
American  &  British  Mfg.  Co.  (D.  C.  1921)  275  Fed.  121 ;  Salinas 
CUyBk.  V.  Graves  (1889)  79  Cal.  192,  21  Pac.  732;  Bell  v.  New 
Y^k  Safety,  etc.  Co.  (C.  C.  1910)  183  Fed.  Z7A\  Fletcher^  Amencan 
Nat.  Bk.  y.  McDermid  (Ind.  1920)  128  N.  E.  685;  Lewis  v.  Bwnk 
of  MobUe  (Ala.  1920)  87  So.  176. 

22 


ill   \ 


r 


f/ 


^ 


obliged  to  claim  as  a  general  creditor.^'  It  would 
seem  from  experience  that  these  facts  are  not 
appreciated  by  the  users  of  trust  receipts.  A  trust 
receipt  can  afford  superior  protection  as  compared 
with  an  unrecorded  chattel  mortgage  only  when 
it  is  used  in  the  circumstances  which  we  have  de- 
scribed, namely,  when  the  title  to  the  property  (as 
distinguished  from  mere  possession  which  connotes 
a  pledge)  is  given  to  the  bank  by  some  one  other 
than  the  debtor  and  where  the  later  delivery  of 
possession  against  trust  receipt  is  made  to  the  debt- 
or. In  commercial  practice,  this  situation  seems 
to  exist  only  in  connection  with  the  financing  of  im- 
portations or  domestic  purchases. 

Ill 

At  this  point  it  is  perhaps  desirable  to  refer  more 
particularly  to  the  recording  laws  and  the  policy 
upon  which  they  are  founded.  Recording  laws 
were,  until  recently  at  least,  peculiar  to  the  United 
States.  A  mortgage  of  property  is  undoubtedly 
valid,  as  between  the  parties,  without  recording. 
But,  to  protect  the  mortgagee  against  a  bona  fide 
subsequent  grantee   or  mortgagee  or   against  the 


*•/«  re  Gerstman,  supra,  footnote  12;  In  re  Shulman,  supra, 
footnote  11;  In  re  Dernbetg  &  Son,  supra,  footnote  12.  A  pledge  or 
mortgage  of  choses  in  action  is  not  within  the  recording  act.  Sec 
New  York  Lien  Law  §  230,  N.  Y.  Cons.  Laws  (2d  ed.  1920)  1093, 
am.  1921;  Sexton  v.  Kessler  &  Co.,  Ltd.  (C.  C.  A.  1909)  172  Fed. 
535,  aff'd  (1912)  225  U.  S.  90,  32  Sup.  Ct.  657;  Stockyards  Nat, 
Bk.  V.  First  Nat.  Bk.   (C.  C.  A.   1918)   249  Fed.  421. 

23 


fl 


claims  of  creditors,  it  is  necessary,  unless  the  mort- 
gagee retains  possession  of  the  property,  to  record 
the  instrument.    Such  recording  is  generally  re- 
garded as  notice  to  all  concerned.    In  the  case  of 
personal  property,  the  reason  for  the  rule  is  some- 
what different  than  in  the  case  of  realty.    Pos- 
session of  real  property  is  only  to  a  slight  extent  an 
evidence  of  ownership,  but  in  the  case  of  personalty 
it  has  long  been  asserted  that  possession  is  one  of 
the  strong  evidences  of  title,  and  the  policy  has, 
to  a  great  extent,  been  adopted,  that  we  will  not 
"suffer  without  notice  to  the  world  the  real  owner- 
ship to  be  in  one  person  and  the  ostensible  owner- 
ship in  another"  for  the  reason  that  it  gives  a  false 
credit  to  the  latter  which  leads  to  injury  to  third 
persons."    Consequently,  laws  are  in  general  force 
providing  for  the  recording  of  chattel  mortgages 
and  conditional  sales.    There  can  be  no  question  as 
to  the  power  of  the  legislature  to  include  trust 
receipts  under  this  principle.     It  has  been  held,  how- 
ever, in  many  states  that  the  trust  receipt  is  not  a 
"mortgage"  or  "conditional  sale"  within  the  meaning 
of  the  existing  recording  laws.     Such  a  ruling  finds 
its  justification  in  business  necessity  and  in  a  real 
difference  in  the   situations  as  has   already  been 
pointed  out.     It  is,  however,  entirely  possible  to 
frame  a  recording  act  in  such  a  way  as  to  include 


i,i- 


"  See  Century  Throwing  Co.  v.  MtUler  (C.  C.  A.  1912)   197  Fed.   . 
252.  258. 

24 


^ 


*> 


W 


trust  receipts.  The  wisdom  of  so  doing  is  open  to 
serious  question.  Some  of  our  states  have,  how- 
ever, taken  this  step. 

In  In  re  Bettman- Johnson  Co./"  the  question  arose 
with  respect  to  the  Ohio  recording  statute.  Cherries 
had  been  imported  in  the  usual  way  and  delivered  to 
the  importer  against  his  trust  receipt.  They  were 
in  his  possession  at  the  time  of  his  bankruptcy  and 
the  bank  endeavored  to  recover  possession  of  them. 
The  court  admitted  that  the  bank  held  the  title  for 
the  purpose  of  security,  but  held  that  as  against 
general  creditors  or  a  receiver  or  trustee,  the  prop- 
erty could  be  claimed  by  the  bank  only  if  the  trust 
receipt  had  been  verified  and  filed  in  the  recorder's 
office  in  accordance  with  the  recording  act.  The 
trust  receipt  is,  therefore,  practically  valueless  in 
Ohio  when  not  recorded.  In  Illinois,  also,  it  ap- 
pears to  be  conclusively  settled  that  a  trust  receipt 
is  valueless  as  against  creditors  or  a  trustee  in 
bankruptcy  unless  duly  acknowledged  and  re- 
corded.^® 


«  (C    C    A.   1918)   250  Fed.   657.  „     .      •        _.  . 

w  In  'the'  case  of  In  re  Richheimer,  supra,  footnote  9,  the  importer 
repledged  a  large  part  of  the  goods  imported  and  delivered  to  him 
under  trust  receipt.  As  to  such  portion  tl}«nghts  of  the  pledgee 
were  held  to  be  superior  to  those  of  the  holders  of  the  t™st  «. 
ceipts.  That  result  occasions  no  comment  at  this  point,  althougn 
there  is  no  factors'  act  in  Illinois.  The  court  further  held,  how- 
ever,  that  the  holders  of  the  trust  receipts  could  not  recover  the 
possession  of  a  portion  of  the  shipment  which  had  not  been  so 
pledged,  but  which  had  remained  in  the  possession  of  the  importer 
and  thence  passed  into  the  hands  of  the  trustee  in  bankruptcy. 
This  holding  was  explicitly  made  upon  the  strength  of  the  recording 
act,  upon  the  ground  that  the  trust  receipt  fell  within  the  policy  of 
that  act  as  to  secret  liens  and  reservations  of  title.  Ihe  trust 
receipt  in  Illinois,  therefore,  if  unrecorded,  is  without  special  value 


I. 


I 


lll 


I 


! 


In  Virginia  the  standing  of  a  trust  receipt  ap- 
pears uncertain.  In  Boice  v.  Finance  &  Guaranty 
Corporation,^'^  a  dealer  in  automobiles  financed  the 
purchase  of  several  cars  with  the  aid  of  the  Finance 
Corporation  and  gave  to  it  chattel  mortgages  which 
were  duly  recorded  and  which  did  not  contain  any 
express  power  of  sale.  He  then  sold  one  of  the 
cars  to  Boice  and  failed  to  pay  off  the  mortgage  with 
the  proceeds.  The  Finance  Corporation  brought 
an  action  of  detinue  against  Boice.  The  court  held 
that  under  the  statutes  and  policy  of  Virginia,  the 
car  belonged  to  Boice  in  spite  of  the  constructive 
notice  of  the  record,  since  he  had  no  actual  notice. 
The  theory  was  that  the  property  was  put  in  the 
hands  of  a  dealer  ostensibly  for  sale  and  that  this 
in  effect  constituted  a  power  of  sale.  The  court 
said : 


a 


Property  bought  for  the  express  purpose  of  daily 
indiscriminate  sale  to  the  general  public,  exposed 
for  such  sale  at  the  place  of  business  of  a  licensed 
dealer,  and  over  which  the  dealer  is  permitted  to 
exercise  the  dominion  of  owner,  cannot  be  made 
the  subject  of  a  valid  chattel  mortgage     . 

as  security.  Sec  Union  Trust  Co.  v.  Trumbull  (1891)  137  HI.  146, 
27  N.  E.  24.  In  In  re  Hamden  (D.  C.  1912)  200  Fed.  175,  it  was 
held  that  in  New  Mexico  a  chattel  mortgage  of  goods  is  not  void 
as  a  matter  of  law  because  the  mortgagor  retains  possession  and 
can  sell  in  the  usual  course  of  business  without  accounting  to  the 
mortgagee.  ^  The  federal  courts,  of  course,  follow  the  local  state 
law  on  this  question.  It  is  interesting  to  contrast  the  reasoning 
and  result  of  the  Richheimer  case  with  that  of  In  r#  B,  Reboulin 
Fits  (D.  C.  1908)  165  Fed.  245,  decided  with  reference  to  the  law 
of  New  Jersey,  which  permitted  the  recovery  of  goods  or  their 
proceeds  from  a  trustee  in  bankruptcy. 
"  (1920)   127  Va.  563,  102  S.  E.  591. 

26 


^m9 


the  powers  which  the  dealer  is  permitted  to  exercise 
over  the  property  in  such  case  are  inconsistent  with 
a  mortgage  thereon."^® 

This  does  not,  of  course,  directly  bear  upon  the 
trust  receipt,  since  a  power  of  sale  is  usually  given 
in  that  instrument.  There  is,  however,  language  in 
the  opinion  which  affords  basis  for  the  view  that 
such  a  mortgage,  even  though  recorded,  is  invalid 
in  Virginia  as  against  creditors  of  the  mortgagor. 
It  seems  doubtful  whether  the  court  in  a  square 
case  would  go  to  the  full  extent  of  that  expression. 
The  principle  seems  to  be  of  doubtful  validity  in  any 
case  except  that  of  a  purchaser  in  ordinary  course 
of  business  from  a  dealer.^^  General  creditors  who 
were  such  at  the  time  of  the  making  of  the  mort- 
gage have  not  been  deceived  or  injured.  Later 
pledgees  or  mortgagees  of  the  property  should  cer- 
tainly be  charged  with  notice  of  the  earlier  mort- 
gage which  has  been  recorded,  since  they  are  not 
in  a  similar  position  to  that  occupied  by  ordinary 
buyers.  The  same  may  be  said  of  later  general 
^  creditors.  The  opinion  in  this  case,  however,  raises 
doubt  as  to  the  validity  of  trust  receipts  in  Vir- 
ginia 


20 


«  See  also  O'Neil  v.  Cheatwood  (1920)  127  Va.  96,  102  SE,  596. 

^  See  Bryant  v.  Swofford  Bros,  (1909)  214  U.  S.  279,  29  Sup. 
Ct.  614;  In  re  Pierce  (C.  C.  A.  1907)   157  Fed.  757. 

» See  also  Glass  v.  ConHnental  Guaranty  Co.  (Fla.  1921)  89  So. 
876.  In  that  case  the  dealer  had  no  express  power  of  sale.  Ihc 
agreement  was  not  recorded.  The  holder  of  the  trust  receipt  failed 
in  an   effort  to  recover  possession  from  a  bona  fide  purchaser. 

27 


II 


A  recent  decision^^  of  the  United  States  District 
Court  for  the  Eastern  District  of  South  Carolina 
raises  most  serious  questions  as  to  the  law  of  South 
Carolina.  Here  a  domestic  purchase  was  financed 
and  the  goods  turned  over  under  a  trust  receipt 
which  was  not  recorded.  The  court  held  that  the 
instrument  was  in  the  nature  of  a  chattel  mortgage 
and  that  under  the  South  Carolina  statute  such  an 
instrument  was  void  as  against  subsequent  creditors 
without  notice  unless  recorded.  Possession  of  the 
goods  had  been  retaken  by  the  holder  of  the  trust 
receipt  prior  to  the  bankruptcy,  but  the  court 
directed  that  it  be  returned  to  the  trustee  in  bank- 
ruptcy for  administration  as  part  of  the  general 
assets  of  the  estate. 

This  decision  seems  to  be  open  to  serious  ques- 
tion. By  "subsequent  creditors''  can  hardly  be 
meant  general  creditors,  but  rather  subsequent 
pledgees,  mortgagees  or  others  who  have  obtained 
specific  rights  in  the  property  by  attachment,  levy 
or  otherwise.^^  There  were  none  such  at  the  time 
when  the  possession  was  retaken  by  the  defendant 
prior  to  the  bankruptcy.  How  could  the  fact  that 
temporary  possession  had  been  given  to  the  signer 
of  a  trust  receipt  under  a  contract  presumably  good 
between  the  parties,  affect  the  rights  of  the  de- 

^Cappleman  v.  Industrial  Finance  Corporation   (1921),*   aff*d  C. 

C.   A.    284   Fed.   8.  ,  ,0.^., 

**See   Union   Trust   Co.  v.    Trumbull,  supra,  footnote   16;   Sktlton 

▼.  Codington  (1906)   185  N.  Y.  80,  77  N.  K  790. 

28 


|| 


1* 


i 


f endant  as  a  security  holder  in  possession  after  such 
possession  had  been  retaken?  Obviously,  it  could 
affect  the  rights  only  if  the  contract  was  void  as  be- 
tween the  parties.  Only  on  this  basis  could  the  de- 
livery be  held  to  constitute  a  preference.  If  the 
contract  was  good  as  between  parties,  then  redelivery 
was  not  preferential.""  The  decision,  unless  based 
upon  the  express  statutes  of  South  Carolina,  is  op- 
posed to  the  overwhelming  weight  of  authority. 

The  law  in  Louisiana,  on  the  other  hand,  goes  to 
the  opposite  extreme.  In  In  re  Dreuil  &  Co.,^^  the  sit- 
uation was  not  what  we  have  termed  a  proper  one 
for  the  use  of  a  trust  receipt.  The  bankrupt  pledged 
bills  of  lading  to  a  bank.  It  regained  possession  by 
signing  a  trust  receipt.  It  then  warehoused  the 
goods  and  pledged  the  warehouse  receipts  and  again 
obtained  possession  by  signing  a  trust  receipt.  In 
Louisiana,  a  pledgee  apparently  obtains  title  and  the 
case  therefore  presents  what  would  ordinarily  be 
called  a  chattel  mortgage.  The  banks  (pledgees) 
combined  and  asked  for  the  possession  of  the  goods 
'  from  the  trustee  in  bankruptcy.  In  other  jurisdic- 
tions they  would  have  failed."^  In  Louisiana  they 
were  successful."*  This  can  only  mean  that  the  re- 
turn of  pledged  property  to  the  pledgor  is  not  neces- 

»/n  re  Perlhefter   (D.   C.   1910)    177  Fed.   299. 

**(D.  C.   1913)   205  Fed.   573.  ^,    , 

^  In  re  Gerstman,  supra,  footnote  12;  In  re  Shulman,  supra, 
footnote   11;   In  re  Dernberg  &  Son,  Inc.,  supra,  footnote   12. 

»See  also  Commercial  Nat.  Bk.  v.  Canal  Bk.  (1916)  239  U.  S. 
520,  36  Sup.  Ct.  210;  In  re  Dreuil,  supra,  footnote  24;  s.  c.  (C 
C.  A.   1914)   211  Fed.  337. 

29 


\ 


sarily  fatal  in  that  state.  Prior  to  1918,  chattel 
mortgages  were  in  general  apparently  unknown  in 
Louisiana  law.*^  They  now  depend  upon  a 
statute^®  the  form  of  which  is  quite  different  from 
that  in  common  use  elsewhere.  A  Louisiana  pledge 
has  hitherto  been  similar  in  effect  to  what  is  known 
elsewhere  as  a  mortgage,  and  possession  could  only 
be  returned  to  the  pledgor  for  a  special  or  tem- 
porary purpose.**  The  Dreuil  case  can  only  be  ex- 
plaint  satisfactorily  by  reference  to  the  special 
legal  system  of  Louisiana. 

IV 

We  will  now  examine  in  some  detail  the  history 
of  the  peculiar  doctrine  of  trust  receipts.  They  rep- 
resent a  comparatively  recent  development  in  the 
law  relating  to  commercial  banking  and  security. 

In  1843,  Judge  Story  rendered  a  decision'®  in  the 
federal  Circuit  Court  of  Massachusetts,  under  the 
following  circumstances :  The  plaintiffs  had  loaned 
money  to  the  bankrupt  for  the  purchase  of  goods 
under  his  agreement  to  pledge  the  property  bought 
as  security  for  the  loan  and,  meantime,  to  hold  the 
bills  of  lading  and  other  documents  for  the  plain- 
tiffs' account.    He  disposed  of  part  of  the  goods. 


-i^-ir 


-♦ 


« See  DHoP  v.   Windsor  (1874)  26  La.  Ann.   185. 

«Law8   1918,  Na    198.  -..«...., 

^BrUton  v.  Harvey  (1895)  47  La.  Ann.  259.  16  So.  747;  Jacqu€$ 
V.  CrgdUars  (1886)  38  La.  Ann.  863.      ^ 
'^Fletcher  v.  Morey   (C.  C.   1843)   2  Story  555. 

30 


I 


He  later  became  bankrupt,  his  assignee  (i.  e.,  trus- 
tee) held  part  of  the  goods  and  the  proceeds  of 
other  parts  sold.  The  plaintiffs  brought  an  action 
in  equity  to  establish  a  lien  on  the  property  and 
proceeds  in  the  assignee's  bonds.  Judge  Story  up- 
held the  bill  and  gave  the  property  to  the  plaintiffs. 
He  spoke  of  the  case  as  an  "equitable  lien"  with- 
out determining  whether  it  was  an  equitable  pledge 
or  mortgage,  and  held  in  principle  that  it  was  en- 
y  forcible  against  all  except  bona  fide  purchasers  from 
the  bankrupt  for  valuable  consideration  and  without 

notice. 

Equitable  mortgages  of  realty  had  long  been  en- 
forced, but  this  appears  to  be  one  of  the  earliest 
cases  in  which  an  analogous  equitable  right  was  rec- 
ognized and  enforced  in  respect  to  personalty.*^ 

This  case  is  really  similar  to  a  trust  receipt  case. 
It  would  have  been  precisely  such  a  case  if  the  bills 
of  lading  had  been  drawn  to  the  order  of  the  lender 
and  by  him  delivered  against  a  trust  receipt  The 
agreement  seems  to  have  contemplated  that  the  title 
t^-^hould  pass  directly  to  the  lender  as  security  even 
though  it  was  spoken  of  as  a  "pledge."  If  so,  the 
decision  is  in  accord  with  modern  law  on  the  sub- 
ject.   In  later  cases,  we  find  that  the  rights  of  the 

•*  Equitable  assignment:  Lowery  v.  Steward  (1862)  25  N.  Y. 
239;  see  also  German  Bk,  v.  Edwards  (1873)  53  N.  Y.  541;  Par- 
shall  V.  Eggert  (1873)  54  N.  Y.  18.  Equitable  mortgage  to  secure 
the  debt  of  a  third  person:  Blake  v.  Corbett,  supra,  footnote  8. 
Equitable  mortgage:  National  Bk.  of  Deposit  v.  Rogers  (1901)  166 
N.  Y.  380,  59  N.  E.  922;  Sexton  v.  Kessler  &  Co.,  Ltd.,  supra, 
footnote  13. 

^  31 


II 


I 


I 


f 


1 

I 


lender  are  upheld,  even  though  no  trust  receipt  has 
been  used,  provided  the  agreement  between  the 
parties  is  clearly  shown  and  no  superior  equities 
have  intervened.«2  The  case  is  illustrative  of  the 
readiness  of  the  courts  to  recognize  the  needs  and 
practices  of  business  and  to  protect  creditors  in  con- 
nection therewith  so  long  as  superior  equities  do  not 
intervene.  In  later  trust  receipt  cases,  the  funda- 
mental principle  of  this  decision  seems  often  to  have 
been  in  the  minds  of  the  court.  Again  possession 
is  said  in  general  to  be  essential  to  the  rights  of  a 
pledgee,  but  the  courts  have  repeatedly  recognized 
the  principle  that  a  pledgee  might  relinquish  posses- 
sion to  the  pledgor  "for  a  special  purpose,"  giving 
him  what  might  be  termed  custody  or  a  limited 
control  without  losing  his  rights  as  pledgee.^^ 

Another  early  case  which  resembles  the  trust  re- 
ceipt situation  was  decided  in  New  York  in  1874." 
The  plaintiff  discounted  a  draft  drawn  on  the  con- 
signee and  received  the  bill  of  lading  with  the  draft. 
The  consignee  refused  to  pay  the  draft  but  obtained 
the  goods  by  an  attachment  and  sold  them.**^  It  was 
held  that  the  plaintiff  was  a  mortgagee  in  possession 

«/n  re  Marks  &  Co,  (C.  C.  A.  1915)  222  Fed.  52;  Merchants' 
Exch.  Bk.  V.  McGraw  (C.  C.  A.  1896)  76  Fed.  930;  Southern  Flour 
&  Grain  Co.  v.  Central  Texas  Exch.  Nat.  Bk.  (Ga.  1921)  109  S.  E. 
685.  It  must  be  noted,  however,  that  in  none  of  these  cases  have 
the  goods  previously  belonged  to  or  been  in  the  possession  of  the 
borrower   and    prospective  buyer.  r^    .  , .    ,.«««x 

»Hutton  V.  Arnett  (1869)   51   111.   198;   Thayer  v.  Dvnght  (1870) 

104  Mass    254 
^ First' Nat.' Bk.  v.  Kelly   (1874)   57  N.  Y.   34. 
»  See  also  Merchants^  Exch,  Bk.  v.   McGraw,  supra,  footnote  32. 

32 


\  through  its  possession  of  the  bill  of  lading,  that  it 

'^  ^  j  was  not  required  for  that  reason  to  record  the  mort- 
gage, and  that  it  was  entitled  to  be  paid  the  amount 
of  the  draft  out  of  the  proceeds  of  the  property. 
This  case  is  interesting  because  it  recognizes  the  sit- 
uation as  a  chattel  mortgage.  The  plaintiff  was  in 
exactly  the  same  situation  as  the  banker  who  hands 
the  importation  to  his  customer  against  a  trust  re- 
ceipt. In  this  case,  the  buyer  obtained  the  prop- 
•  erty  without  signing  a  trust  receipt,  but  also  with- 
out the  bank's  consent.  The  court,  therefore,  was 
able  to  give  protection  to  the  bank  while  at  the  same 
time  it  recognized  that  the  bank  was  the  holder  of 
an  imrecorded  chattel  mortgage.  When  the  next 
step  was  presented  by  facts  similar  to  those  found 
in  a  trust  receipt  case^®  in  which  the  debtor  obtained 
possession  with  the  bank's  consent,  the  court  still 
gave  protection  to  the  bank  (although  it  was  as  the 
court  had  already  held  in  the  last  case,  the  holder  of 
a  special  variety  of  unrecorded  chattel  mortgage) 
by  declining  to  admit  that  the  arrangement  was  in 
^all  respects  a  mortgage.  The  ultimate  result  was, 
•  in  effect,  the  recognition  that  it  was  not  such  a  chat- 
tel mortgage  as  to  come  within  the  terms  of  the  re- 
cording acts. 

The  line  of  cleavage  thus  becomes  clear.    In  the 
later  cases,  in  New  York  at  least,  there  is  a  distinct 


^Mechanics  &  Traders*  Bk.,  etc.  v.  Farmers  &  Mechanics*  Nat, 
Bk.   (1875)   60  N.  Y.  40. 

33 


) 


II 


. 


unwillingness  to  define  the  rights  of  the  bank  by 
name,  but  it  is  universally  recognized  that  it  has  a 
security  title.  In  Mechanics  &  Traders'  Bk.,  etc.  v. 
Farmers  &  Mechanic^  Nat.  Bk.,  etc.,"  the  court 
said: 

"The  judge  ruled  at  the  trial  that  the  plaintiff  [the 
lending  bank]  was  a  mortgagee  of  the  grain ;  but 
whether  the  plaintiff  held  it  as  mortgagee,  pledgee, 
or  by  any  other  title  is  not  material,  so  long  as  the 
title  or  the  right  to  the  possession  was  vested  m  the 
plaintiff.  To  all  intents  and  purposes  the  plaintiff  s 
property  in  the  wheat  was  clearly  established  and 
beyond  any  question." 

As  the  action  was  for  conversion  of  the  wheat,  the 
case  can  hardly  be  explained  as  one  of  equitable 
mortgage  or  pledge.  If  it  was  a  pledge,  the  bank 
had  surrendered  possession,  whether  for  a  special 
purpose  or  not.  But  the  court  said  further :  "The 
[warehouse]  receipt  taken  for  the  wheat  by  W 
[the  intended  buyer] ,  in  his  own  name,  was  without 
authority  and  did  not  divest  the  plaintiff  of  the  title 
which  had  been  lawfully  acquired."  " 

The  general  doctrine  was  upheld  by  the  Supreme 
Court  of  the  United  States  in  1875  in  Dows  v. 
National  Exchange  Bank  of  Milwaukee,*^  an  im- 
portant case  coming  from  the  State  of  New  York. 


«/wi.'  51.  *  For  the  later  litigation  growing  Jfrom  the  facts  of 
this  case,  sec  Farmers  &  Mechanics'  Nat.  Bk,  v.  Erte  Ry.  (1878)  72 
N.   Y.    188. 

»  (1875)  91  U.  S.  618. 

34 


/%|e,* 


A  bank  discounted  a  draft  accompanied  by  a  bill 
of  lading  drawn  to  its  order.  It  forwarded  the 
papers  to  its  correspondent  with  instructions  to  de- 
liver only  on  payment  of  the  draft.  The  goods  were 
placed  in  a  warehouse  of  the  drawee  who  acknowl- 
edged receipt  as  warehouseman  only.  He,  however, 
sold  the  goods  and  delivered  them  to  another.  The 
court  held  that  the  bank's  correspondent  could  not 
divest  its  title  prior  to  payment  of  the  drafts ;  that 
the  goods  were  placed  in  the  drawee's  hands  not 
as  owner  but  as  bailee,  i.  e.,  for  a  special  purpose; 
that  the  title  of  the  bailor  was  not  lost  by  such  de- 
livery and  that  a  sale  or  delivery  by  the  bailee  gave 
no  title  to  the  purchaser,  who  was  therefore  liable 
for  conversion. 

The  bearing  of  these  early  cases  is  obvious.  They 
contain  the  essential  principle  of  the  trust  receipt 
doctrine.  It  is  interesting  to  note,  however,  that 
every  one  of  them  arose  in  connection  with  a  do- 
mestic transaction,  whereas  the  name  of  trust  re- 
ceipt is  chiefly  associated  with  importations  from 

abroad. 

The  earliest  reported  case  in  which  the  word 
"trust  receipt"  is  used  appears  to  be  Barry  v. 
Boninger,^''  decided  in  1877.  The  precise  form  of 
the  instrument  is  not  stated  but  in  substance  it  ap- 
pears to  have  resembled  those  now  in  use.  It  was 
used  in  connection  with  the  delivery  of  an  importa- 


^46  Md.   59. 


35 


I 


tion  of  sugar  to  the  importer,  who  had  obtained 
a  credit  therefor  from  the  bank.  It  gave  a  right 
of  sale  with  the  obligation  to  account  for  the  pro- 
ceeds until  all  drafts  were  paid.  Sale  was  effected 
through  brokers.  The  importer  failed  and  the 
brokers  attempted  to  withhold  from  the  proceeds 
not  only  their  commission  for  the  particular  sale, 
but  other  commissions  due  them  from  the  importer. 
The  court  held  that  the  property  in  the  sugar  was 
in  the  bankers  under  the  letter  of  credit  and  the 
trust  receipt,  and  that  the  brokers  could  not  with- 
hold from  the  proceeds  the  amount  of  commissions 
due  them  from  others  (i.  e.,  from  the  importers). 

We  may  be  permitted  to  pause  at  this  point  to 
consider  further  the  origin  of  the  name  "trust  re- 
ceipt." The  use  of  the  word  "receipt"  is  obviously 
appropriate,  but,  as  has  already  been  remarked,  the 
equitable  notions  of  a  "trust"  are  quite  different 
from  those  connected  with  the  importer's  obliga- 
tions. Perhaps  the  word  "bailment"  would  more 
accurately  describe  the  situation.*^  Indeed,  the 
term  "bailee  receipt"  is  not  unknown  in  connection 
with  documents  intended  to  accomplish  the  same 
purpose  as  trust  receipts.  It  is,  however,  uncom- 
mon and  it  would  appear  from  various  points  of 
view  to  be  undesirable  to  use  a  new  or  unaccustomed 
name  for  documents  which  have  become  generally 

**Sec  Century  Throwing  Co.  v.  Muller,  supra,   footnote   14. 

36 


. 


familiar  to  the  courts  as  well  as  to  the  business 
world  as  trust  receipts. 

Fiduciary  obligations  are  not,  however,  within 
the  exclusive  province  of  equity.  If  A  delivered 
property  to  B,  whether  goods  or  a  sum  of  money, 
for  a  special  purpose  such  as  for  the  purpose  of  de- 
livery to  C  or  to  sell  and  turn  over  the  proceeds  to 
A,  this  constituted  a  bailment  and  gave  rise  in  early 
English  law  to  the  law  action  of  account.  This  is 
now  obsolete,  but  its  successors  are  detinue  and 
replevin,  and  the  relation  between  the  parties  was 
that  of  a  common  law  trust — an  entrusting  or  bail- 
ment. In  this  sense,  the  use  of  the  word  "trust" 
is  entirely  apt,  but  its  significance  is  in  sharp  con- 
trast to  that  of  the  creature  known  to  equity  as  a 
"trust."  In  a  common  law  trust  the  title  is  in  the 
entrusting  party — ^the  bailor.  In  an  equitable  trust, 
title  is  in  the  entrusted  party — the  trustee.  It  seems 
highly  probable,  therefore,  that  the  name  "trust  re- 
ceipt" is  derived  from  the  common  law  notion  of 
trust  and  in  that  view  the  name,  as  a  whole,  is  ap- 
propriate. It  is  doubtless  also  a  fact  that  the  word 
"trust"  has  a  value  in  business  where  legal  refine- 
ments mean  little.  Its  use  may  unconsciously  cause 
the  importer  to  observe  the  obligation  with  greater 
care  because  of  a  high  respect  for,  though  unaccom- 
panied by  a  refined  understanding  of,  the  obliga- 
tions of  a  "trustee." 

37 


■ 


i 


It  was  not  long  before  other  decisions  in  New 
York  were  handed  down  which  firmly  established 
the  foundations  upon  which  trust  receipts  are  built. 
The  most  important  is  Farmers  &  Mechanics'  Nat. 
Bk.  V.  Logan.*'    This  case,  like  its  predecessors  in 
New  York,  arose  in  connection  with  a  domestic 
shipment  of  grain.   The  bank  took  the  bills  of  lading 
to  its  own  order  against  draft  drawn  on  the  buyer, 
who  had  initiated  the  transaction.     Upon  the  ac- 
ceptance of  the  draft,  he  was  handed  the  bills  of 
lading  without  endorsement,  accompanied  by  a  writ- 
ing saying  that  the  grain  was  pledged  with  the  bank 
and  was  put  into  his  custody  "in  trust"  as  security 
for  the  payment  of  the  draft.     He  was  given  no 
power  of  disposal.     He,  however,  sold  to  the  de- 
fendant Logan  and  another.    The  court  held  dis- 
tinctly that  the  bank  was  not  a  mere  pledgee,  as  it 
was  agreed  that  retention  of  possession  by  the  bank 
was  essential  to  a  pledge  as  against  a  bona  fide  pur- 
chaser from  the  pledgor.    In  resting  its  case  upon 
the  title  of  the  bank,  it  laid  preeminent  stress  upon 
the  fact  that  such  title  had  come  to  it  from  another 
source  than  the  buyer.    It  recognized  that  he  had 
some  interest  or  right  in  the  property  but  it  did  not 
define  that  right  and  it  carefully  avoided  any  men- 
tion of  what  it  may  have  regarded  as  a  disastrous 
term— "mortgage."    The  opinion   reads  as  if  the 
court   thought   the   great   principle   involved   was 


(1878)   74  N.  Y.  568. 


i 


i 


38 


"caveat  emptor."  "  In  this  case,  the  defendant  had 
actual  notice  of  the  rights  of  the  plaintiff.  It  is,  of 
course,  obvious  tiiat  if  a  trust  receipt  is  vaUd  as  be- 
tween the  parties,  it  loses  none  of  its  validity  by  a 
transfer  of  the  property  to  one  who  has  notice  of 
the  rights  of  the  holder  of  the  trust  receipt.** 

Following  these  decisions,  instruments  framed  to 
give  security  under  the  principles  established  by 
them  began  to  be  used  in  business  in  New  York. 
One  such  instrument  resembling  a  trust  receipt  is 
found  in  Carter  v.  Arguimhau*''  decided  in  1884. 
In  tiaat  case,  imported  goods  had  been  delivered  to 
an  importer  who  signed  a  receipt  giving  him  power 
to  sell.  The  receipt  contained  the  obligation  to  hold 
the  goods  and  their  proceeds  "under  Uen"  as  agent 
of  the  bankers.  The  word  "lien"  is  sometimes 
found  in  trust  receipts  in  use  at  the  present  time. 
It  invariably  gives  rise  to  difficulty,  although  the 
courts  are  careful  to  explain  it.*'  There  is  no  oc- 
casion for  its  use  and  it  should  be  scrupulously 
avoided.  The  banker  has  titie,  not  a  lien.  As  was 
said  in  In  re  Liberty  Silk  Co." 

«See  also  Farmers  &  Mechanics'  Nat.  Bk.  v.  Atkinson  (1878) 
74  N.  Y.  587;  Farmers  €r  Mechanics'  Nat.  Bk.  v.  Haseltine  (1879) 

78  N.  Y.  104. 

«See  Cole  v.  Mann  (1875)  62  N.  Y.  1. 

«31  Abb.  N.  C.  3. 

*•  See  In  re  Cattus,  supra,  footnote  10. 

"  (D.  C.  1907)  152  Fed.  844.  In  this  case  there  was  no  trust 
receipt,  but  a  mere  provision  to  "retain  a  prior  lien  upon  the  under 
noted  goods  until  payment  has  been  made."  The  contract  also 
purported  to  give  "a  prior  lien  upon  the  goods  ...  or  an 
equivalent  value  until  payment  has  been  made."  The  customer  was 
obviously  intended  to  sell  the  goods  or  use  them  m  the  course  of 

39 


f 


\ 


"A  seller  cannot  at  the  same  time  retain  title  to  that 
which  he  sells  and  a  lien  on  the  article  sold.  A  lien 
in  favor  of  A,  whether  it  be  regarded  as  a  jus  in  re 
or  a  jus  ad  rem,  presupposes  title  in  another  and 
A's  acquirement  of  title  extinguishes  his  lien." 

In  the  case  of  Carter  v.  Arguimhau,  the  importer's 
property  was  in  the  hands  of  an  assignee  for  the 
benefit  of  creditors,  and  the  banker  sought  to  re- 
cover the  possession  of  the  goods  remaining  un- 
sold and  of  the  proceeds  of  those  sold.  The  hold- 
ing was  that  he  was  entitled  to  such  goods  and  pro- 
ceeds in  so  far  as  they  could  be  traced.*®  The  court 
expressly  refused  to  construe  strictly  the  words 
"under  lien"  saying  that  they  should  be  regarded  as 
meaning  "subject  to  the  prior  claim  of  the  bankers." 
This  case  does  not  involve  the  factors'  act,  but  it 
was  of  necessity  a  direct  decision  that  the  receipt 
which  was  in  the  nature  of  a  trust  receipt  was  ef- 
fective, even  though  not  recorded.*®    The  court  did 


*.  f 


manufacture,  and  the  terms  of  the  delivery  imposed  no  obligation 
to  account  for  the  proceeds.  Quite  naturally  the  arrangement  was 
overthrown  in  favor  of  the  trustee  in  bankruptcy.  There  seems 
to  have  been  no  attempt  to  do  the  business  on  the  basis  of  trust 
receipts  or  upon  the  theory  of  reservation  of  title  upon  which  they 
depend,  although  it  would  seem  that  the  transaction  could  have  been 
carried  through  in  such  a  manner  as  to  gain  the  protection  afforded 
by  trust  receipts. 

«See  also  Dennistown  v.  Barr  (1893)  31  Abb.  N.  C.  21;  28  N. 
Y.  Supp.   255. 

•  It  seems  that  an  unrecorded  chattel  mortgage  would  be  valid 
in  New  York  under  similar  circumstances.  Skilton  v.  Codington, 
supra,  footnote  22.  The  earlier  rule  seems  to  have  been  more 
severe-  Stephens  v.  Perrine  (1894)  143  N.  Y.  476,  39  N.  E.  11. 
An  assignee  for  the  benefit  of  creditors,  however,  has  no  rights 
superior  to  those  of  his  assignor.  Bell  v.  New  York  Safety,  etc. 
Co.,  supra,  footnote  12;   Wilson  v.  Esten   (1885)    14  R.  I.  621. 

40 


i 


not  attempt  to  define  the  nature  of  the  security  po- 
^        sition  of  the  bank. 

In  Moors  v.  Kidder,^^  an  importation  was  deliv- 
ered to  the  importer  under  an  agreement  analogous 
to  a  trust  receipt,  for  the  sole  purpose  of  making 
customs  entry  and  warehousing.  The  importer, 
however,  pledged  it  to  a  lender  who  did  not,  how- 
ever, take  it  in  reliance  upon  the  bill  of  lading,  which 
was  in  the  importer's  hands.  This  is  an  important 
case  in  connection  with  the  factors'  act,  and  the 
pledgee  was  unsuccessful  in  maintaining  the  pledge 
because  the  importer  had  no  power  of  sale,  and  be- 
cause the  lender  had  not  placed  reliance  upon  the 
importer's  apparent  title  represented  by  the  bill  of 
lading  which  was  not  shown  to  him.  The  receipt 
spoke  of  the  goods  as  being  "pledged  and  hypothe- 
cated" with  the  bankers.  The  court  refused  to  con- 
strue these  words  strictly,  saying  very  pertinently 
thati  "very  likely  the  transfer  was  rather  in  the 
nature  of  a  mortgage  in  which  the  title  passes  than 
^'  in  that  of  a  pledge  in  which  the  pledgor  is  the  gen- 
eral owner." 

The  first  reported  case  which  has  been  found  m 
New  York  in  which  the  term  "trust  receipt"  is  used 
is  English  Bank  of  Rio  de  Janeiro  v.  Barr.^^  The 
decision  was  in  accord  with  Carter  v.  Arguimbau. 

«  (1887)    106  N.  Y.  32,  12  N.   E.  818. 
»  (1888)   31  Abb.  N.  C.  7. 

'  41 


By  this  time  the  trust  receipt  was  in  common  use 
under  that  name. 

At  about  the  same  time,  the  Massachusetts  courts 
established  the  law  of  that  state  in  harmony  with 
the  New  York  decisions  referred  to.**^  They  up- 
held the  claim  of  the  banker  on  the  ground  that  he 
had  a  title  which  was  not  lost  by  delivery  of  the 
custody  of  the  goods  to  the  importer.  At  the  same 
time,  they  were  deciding  that  an  unrecorded  bill  of 
sale  or  chattel  mortgage,  given  to  secure  a  loan  made 
to  the  mortgagor,  was  not  effective  when  not  ac- 
companied by  possession  of  the  property.**  The 
only  real  distinction  between  the  cases  was  that  to 
which  we  have  already  called  attention,  namely,  that 
in  the  first  case  the  security  title  of  the  banker  was 
derived  from  a  person  other  than  the  debtor,  where- 
as in  the  second  the  security  title  of  the  banker  was 
derived  from  such  debtor.  This  is  the  line  of  dif- 
ferentiation which  must  mark  the  proper  trust  re- 
ceipt situation  from!  that  of  the  ordinary  chattel 
mortgage." 


••.'■ 


^*  Moors  V.  IVyman  (1888)  146  Mass.  60,  15  N.  E.  104;  see  also 
Forbes  v.  B.  &  L.  Ry,  (1882)  133  Mass.  154,  as  to  the  effect  of 
delivery  of  a  bill  of  lading. 

^Copeland  v.  Barnes  (1888)  147  Mass.  388,  18  N.  E.  65;  see 
also  Salinas  City  Bk,  v.    Graves,   supra,   footnote   12. 

"  See  also  the  opinions  in  the  more  recent  case,  Peoples  Nat.  Bk. 
V.  Mulholland  (1916)  224  Mass.  448,  113  N.  E.  365,  as  contrasted 
with  the  same  case  in  (1917)  228  Mass.  152,  117  N.  E.  46,  where, 
on  further  examination,  the  case  was  held  to  come  within  the  trust 
receipt  doctrine.  Note  dso  Professor  Williston's  criticism  of  the 
latter  opinion  in  Progress  of  the  Law  1919-20  (1921)  34  Harvard 
Law  Rev.   759. 

42 


f 


In  1889,  the  courts  of  Connecticut  passed  upon 
the  trust  receipt  and  again  upheld  the  banker." 
They  explicitly  declared  that  the  transaction  was  a 
conditional  sale  by  the  banker  to  the  importer.  The 
important  thing  was  that  they  upheld  the  arrange- 
ment without  recording.  The  use  of  the  term  "con- 
ditional sale"  was  probably  due  to  the  fact  that  in 
Connecticut  a  conditional  sale  agreement  was  valid 
without  recording,  whereas  a  chattel  mortgage  en- 
joyed no  such  immunity.  The  true  nature  of  and 
justification  for  the  doctrine  was  not  as  yet  entirely 

clear.*^® 

These  cases  were  shortly  followed  by  a  decision 
in  Wisconsin  in  which  the  right  of  the  banker  to  the 
proceeds  of  goods  sold  by  the  importer  who  held 
them  under  a  trust  receipt  was  upheld  as  against  the 
claims  of  creditors.*^^  The  creditors  endeavored  to 
persuade  the  court  that  the  transaction  was  a  con- 
ditional sale,  which  required  recording  in  Wiscon- 
sin, but  the  court  refused  to  affix  a  definite  label, 
saying  that  if  it  was  a  conditional  sale,  it  had  in  the 
particular  case  been  made  in  either  Connecticut  or 

^New  Haven  Wire  Co.  Cases,  supra,  footnote  3. 

"See  comment  in  Charavay  v.  York  Silk  Mfg.  Co.  (C.  C-  1909) 
170  Fed.  819,  822.  In  Drexel  v.  Pease  (1892)  133  N.  Y.  129,  136, 
30  N.  E.  732,  the  court  said,  in  respect  to  a  situation  rather  similar 
to  that  in  a  trust  receipt,  "the  correspondent  [the  bank]  occupies 
the  position  of  an  owner  under  a  contract  to  sell  and  deliver  when 
the  purchase  price  is  paid."  In  this  case,  the  court  refused  to 
allow  the  bank  to  hold  a  balance  remaining  after  the  payment  of 
the  specific  advances,  as  security  for  a  prior  debt,  as  against  the 
claim  of  a  third  party  who  had  a  proprietary  interest  m  the  prop- 
erty unknown  to  the  bank.  .^  ^^    „,    «- 

^•^Mershon  v.  Moors  (1890)    76  Wis.  502,  45  N.  W.  95. 

43 


Massachusetts,  in  both  of  which  states  it  was  valid 
without  recording.*® 

In  connection  with  these  Massachusetts,  Connec- 
ticut and  Wisconsin  cases,  the  case  of  Moors  v. 
DruT'f^  is  noteworthy,  although  it  does  not  directly 
involve  a  trust  receipt.    The  plaintiff  had  advanced 
money  for  imports  and  received  the  bills  of  lading. 
The  agreement  specified  that  he  should  sell  in  his 
own  name  and  turn  over  any  surplus  to  the  client 
in  this  country.    The  client  became  insolvent  and  his 
estate  was  under  administration  in  the  state  court. 
A  Massachusetts  statute  provided  that  holders  of 
security,  by  way  of  mortgage,  pledge  or  lien,  must 
liquidate  such  security  under  the  direction  of  the 
court  if  they  were  to  be  allowed  to  prove  against 
the  estate  for  any  deficiency.    The  plaintiff  did  not 
do  so  and  objection  was  made  to  his  claim.    The 
court  held  that  he  was  not  a  mortgagee  or  pledgee 
within  the  terms  of  the  statute,  and  allowed  his 
claim.    It  relied  upon  the  foregoing  decisions.    The 
case  is  inconsistent  with  the  notion  that  the  banker 
is  a  conditional  vendor,  for  it  is  general  law  that  a 
retaking  and  sale  by  a  conditional  vendor  terminates 
the  contract ;  that  the  consideration  for  the  obliga- 
tion of  the  vendee  thereby  fails,  and  that  any  de- 
ficiency which  may  result  by  a  sale  below  the  con- 
tract price  cannot  be  recovered  from  the  vendee  or 

*  (1904)    186   Mass.   424.   70  N.   E.  430. 

44 


"•« 


his  estate,*®  It  seems  to  be  unsafe  to  say  that  the 
trust  receipt  situation  is  classified  in  Massachusetts 
as  a  conditional  sale.  It  is  not,  however,  such  a 
mortgage  as  to  be  included  within  the  scope  of 
statutes  relating  to  "chattel  mortgages"  of  the  com- 
mon sort.^^  In  Irhy  v.  Cage,  Drew  &  Co.,''''  prop- 
erty which  had  been  delivered  under  trust  receipt 
was  retaken  from  the  receiver  and  sold  by  the 
banker  for  less  than  the  amount  of  the  debt.  The 
receiver  claimed  that  such  retaking  ended  the  obli- 
gation to  pay,  as  the  arrangement  constituted  a  con- 
ditional sale.  The  court  held  that  it  was  not  a  con- 
ditional sale  and  that  the  banker  could  claim  for  the 
deficiency.** 

The  next  important  case  was  Brown  Bros.  v.  BiU 
lington.^^  In  this  decision,  the  court  repudiated  the 
notion  that  the  trust  receipt  constituted  a  condi- 
tional sale.  It  defined  it  as  a  "bailment"  and  upheld 
the  rights  of  the  bank  as  against  the  general  cred- 
itors of  the  importer.  The  case  is  interesting  be- 
cause under  the  law  of  Pennsylvania  the  creditors 
^  would  have  prevailed  if  the  court  had  been  per- 
suaded to  classify  the  transaction  as  either  a  con- 


00 


\ 


Earle  v.  Robinson  (1895)  91  Hun  363,  36  N.  Y.  Supp.  178, 
afd  (1898)  157  N.  Y.  683,  51  N.  E.  1090;  Minneapolis  Harvester 
Works  V.  Hally   (1881)   27  Minn.  495,  8  N.  W.  597. 

«^  See  Charavay  v.   York  Silk  Mfg.  Co,,  supra,  footnote  56. 

«»  (1908)    121   La.   615,  46   So.   670. 

^  See  also  Barber  Asphalt  Paving  Co.  v.  St.  Louis  Cypress  Co. 
(1908)    121   La.   152,   46  So.   193. 

«♦  (1894)  163  Pa.  St.  76,  29  Atl.  904;  see  also  Monjo  v.  French 
(1894)  163  Pa.  St.  107,  29  Atl.  907;  Bank  v.  Baum  (1898)  187 
Pa.  St.  48,  40  Atl.   975. 

45 


ditional  sale'"  or  an  ordinary  chattel  mortgage.*'  It 
is  further  interesting  because  resort  is  had  to  the 
common  law  principle  of  bailment  which  gives  rise 
to  a  common  law  trust  out  of  which  g^rew  the  law 
action  of  account  to  which  we  have  already  re- 
ferred.'^ It  again  shows  the  readiness  of  the  court 
to  uphold  the  transaction  in  spite  of  the  recording 
acts  when  that  can  by  any  means  be  done.  It  would, 
however,  have  been  impossible  to  reach  the  result 
in  this  case  had  the  title  to  the  goods  come  to  the 
bank  from  the  importer  instead  of  from  a  third  per- 
son. The  vital  nature  of  that  distinction — ^already 
referred  to — ^is  here  peculiarly  clear." 

In  1895,  an  interesting  case,  Blydenstein  v.  New 
York  Sec.  &  Tr.  Co.;''  was  decided  by  the  Circuit 
Court  of  Appeals  for  the  Second  Circuit.  The  par- 
ticular facts  were  somewhat  involved,  but  for  our 
present  purposes  may  be  briefly  summarized.  A 
Scotch  firm  having  a  branch  house  in  New  York  de- 
livered bills  of  lading  of  goods,  shipped  to  them- 
selves in  New  York,  to  a  London  banker  (the  plain- 
tiff) as  security  for  advances.  These  bills  of  lading  ^ 
were  redelivered  to  the  firm  in  New  York  against 
a  trust  receipt  giving  power  of  sale  with  the  obliga- 

«0«  V.   Stveatman   (1895)    166  Pa.   St.   216,  31   Atl.   102. 

««Pa  Stat.  (1920)  §S  8906  et  seq.  A  chattel  mortgage  is  an 
unusual    form   of    security  in    Pennsylvania. 

^^  "Bailment  is  a  recognized  form  of  security  in  Pennsylvania." 
uf^T^'  ^^J^""^^^  088?)  125  Pa.  St.  606,  17  Atl.  504;  Keystone 
W^ch  Case  Co.  v.  Bank  (1900)   194  Pa.  St.   535,  45  Atl.  328 

167  vl  tr^Z^\  At\  1^40^^*  ^'  Nathan   {Bank's  Appeal)    (1895) 
•  (C*  C.  A.  1895)  67  Fed. '469. 

46 


4 


tion  to  account  for  the  proceeds.  The  goods  were 
warehoused  in  the  name  of  the  firm  and  the  nego- 
tiable warehouse  receipts  handed  to  the  defendant 
as  security  for  a  present  loan.  The  firm  then  failed. 
The  banker  claimed  from  the  defendant  the  pro- 
ceeds of  goods  delivered  under  trust  receipt  which 
formed  a  part  of  this  security.  It  will  be  observed 
that  the  facts  in  this  case  are  precisely  those  of  the 
ordinary  unrecorded  chattel  mortgage  where  the 
possession  of  the  goods  is  returned  to  the  mort- 
gagor. It  is  not  the  case  where  the  title  of  the  bank 
was  derived  from  a  person  other  than  the  debtor, 
which  is  the  feature  which  diflFerentiates  the  trust 
receipt  situation  from  the  ordinary  chattel  mort- 
gage. 

Had  all  of  the  essential  events,  therefore,  taken 
place  within  the  State  of  New  York,  the  easy,  nat- 
ural and  proper  decision  would  have  been  to  uphold 
the  position  of  the  defendant  pledgee  upon  the 
ground  that  the  transaction  was  a  chattel  mortgage, 
that  it  was  not  followed  by  delivery  to  and  con- 
^  tinned  possession  of  the  property  by  the  mortgagee, 
and  was  not  recorded.  It  appears,  however,  that 
the  mortgage  was  made,  and  possession  of  the  prop- 
erty as  well  as  title  thereto  (represented  by  the  bills 
of  lading)  was  delivered  in  England  where,  until 
recently  at  least,  it  seems  that  a  chattel  mortgage 
was  valid  without  recording.  Either  for  this  rea- 
son or  because  the  true  nature  of  the  transaction 


47 


was  not  perceived,  the  decision  was  based  upon  the 
factors'  act.  It  was  necessary,  if  the  plaintiff  were 
to  succeed,  that  he  should  establish  that  he  had  ac- 
quired title  by  the  transaction  in  London  and  that 
this  title  had  not  been  lost  by  delivery  under  the 
trust  receipt.  For  the  purpose  of  the  case,  the  court 
conceded  both  points  and  such  concession  was  in 
accord  with  the  facts  so  far  as  the  parties  themselves 
were  concerned.  The  plaintiff  lost  because  the  de- 
fendant was  in  the  position  of  a  bona  fide  pur- 
chaser for  value  without  notice  and  protected  in 
that  position  by  the  factors'  act.    The  court  said  :^^ 

"Assuming  that  the  ownership  of  the  goods 
passed  from  Lipman  &  Co.  [the  Scotch  firm]  to  the 
plaintiffs  in  London  and  did  not  pass  back  by  the 
subsequent  transaction,  Lipman  &  Co.  were  indis- 
putably factors  intrusted  with  the  possession  both  of 
the  documentary  evidence  of  title  and  of  the  goods." 

It  should  be  noted  in  this  particular  case  that  had 
the  defendant  not  been  in  the  position  of  a  bona  fide 
purchaser  for  value,  but  rather  a  mere  creditor 
without  a  specific  claim  obtained  against  the  goods 
for  value  and  without  notice,  the  plaintiff  would 
have  been  successful.  But  he  would  have  succeeded, 
not  because  of  his  trust  receipt  as  such,  but  be- 
cause his  rights  as  chattel  mortgagee,  valid  where 
obtained,  were  not  subject  to  the  recording  acts  of 
New  York.     It  was  not  a  proper  case  for  the  use 


»<»/Wd.  478. 


of  a  trust  receipt,  if,  by  the  use  of  such  a  docu- 
ment, the  banker  supposed  himself  to  be  securing 
greater  protection  than  he  would  obtain  by  taking 
an  unrecorded  chattel  mortgage.*^^ 

That  the  proper  field  for  the  use  of  the  trust  re- 
ceipt is  not  yet  generally  understood,  is  shown  by  a 
recent  case.  In  re  Carl  Dernberg  &  Sons,  IncP  The 
facts  are  quite  similar  to  the  Blydenstein  case.  A 
borrower  delivered  documents  of  title  to  the  bank 
as  security  for  a  loan.  He  later  received  them  back 
on  trust  receipt  and  became  bankrupt.  The  court 
very  properly  declined  to  direct  their  return  by  the 
receiver  to  the  bank.  The  transaction  was  an  ordi- 
nary unrecorded  chattel  mortgage.^^  The  principle 
of  the  decision  was  in  no  sense  new.  It  was  a 
fundamentally  improper  case  for  the  use  of  a  trust 
receipt,  and  the  only  surprising  thing  about  it  is  that 
it  should  have  been  supposed  that  a  trust  receipt 
was  of  any  greater  value  under  the  state  of  facts 
than  an  unrecorded  chattel  mortgage.  The  trust  re- 
ceipt should  not  be  used  when  the  property  is  to  be 
^returned  to  the  person  from  whom  it  was  received 
and  for  whose  obligation  it  is  security.  If  the 
property  is  to  be  returned  under  such  circumstances, 

"For  another  case  growing  out  of  the  same  situation,  see  New 
York  Security  &  Trust  Co.  v.  Lipman  (1899)  157  N.  Y.  551,  52 
N.  E.  595.  The  court  declined  to  consider  the  nature  of  the 
agreement    contained    in   the   trust    receipt    as    between    the    parties 

*^'«(D.  C,  S.  D.  N.  Y.  1921)   supra,  footnote  12,*  afiPd  282  Fed. 

816,   see  *   footnote  12.  ,,  ^^     .-    *▼    «     -,*% 

"See  Moors  v.  Reading  (1897)  167  Mass.  322,  45  N.  E.  760; 
Skilton  V.   Codington,   supra,   footnote   22. 


48 


4 


49 


- 


M 


I 


i 


the  agreement  by  which  it  was  mortgaged  should  be 
recorded.^* 

National  Bank  of  Deposit  v.  Rogers"  is  an  inter- 
esting decision  which  does  not  impair  the  force  of 
the  foregoing  in  any  way.     An  importer  having 
goods  in  bonded  warehouse  wished  to  borrow  money 
with  which  to  pay  the  duty.     He  showed  the  bills 
of  lading  to  the  bank  (the  plaintiff)  and  obtained 
a  loan  upon  signing  a  trust  receipt.    He  then  made 
an  assignment  for  the  benefit  of  creditors.    After 
some  earlier  litigation,  the  bank  pressed  this  action 
in  equity  to  establish  an  equitable  right  in  the  goods 
and  their  proceeds  (either  by  way  of  lien  or  mort- 
gage) and  to  enforce  the  same.     The  court  sus- 
tained the  claim  of  the  bank  as  against  the  assignee. 
It  said  that  the  parties  had  made  an  agreement  with 
respect  to  goods  which  the  importer  did  not  yet  con- 
trol, that  as  between  the  parties  this  agreement  was 
good,  and  that  as  the  assignee  represented  antecedent 
debts,  there  were  no  intervening  equities  which  could 
defeat  the  rights  of  the  bank.    It  did  not  undertake . 
to  decide  whether  this  agreement  contemplated  a 
mortgage,  a  pledge  or  a  mere  lien  by  contract.    If 
it  were  an  agreement  to  give  a  mortgage,  it  could 


•  '*See  In  re  Geritman,  supra,  footnote  12-  7«  n>   Cliui«.<..    «.a.. 
footnote   11;   American   &  iritish  Sec!'co'y    AZe2aL"^^' sTitk 
Mfg.    Co..  supra,  footnote   12;   Bell  v.   New  York   Safetv    .^rri 

F&elT:^  '^L/'^r  ^i^  ;?*•  V>  Graves,  su^tf^^e  % 
y-Ji^k  orM^lZXf^a,  Voo^^fe'lS*"'  """'  '°°*°°*'   '''  "^ 
»  0901)   166  N.  y.  380,  59  N.  E.  922. 

50 


4 


hardly  have  been  more  effective  than  an  actual  mort- 
gage would  have  been  under  the  circumstances  and 
these  circumstances  included  the  fact  that  the  mort- 
gagee did  not  have  possession  and  that  the  agree- 
ment was  not  recorded.    It  is  the  general  rule,  how- 
ever, that  an  unrecorded  chattel  mortgage  can  only 
be  voided  by  a  bona  fide  purchaser,  mortgagee  or 
pledgee  for  value,  or  by  a  creditor  armed  with  a 
judgment  or  some  other  legal  process  authorizing 
the  seizure  of  the  property.     A  trustee  in  bank- 
ruptcy is  included  in  this  class."    Since  the  assignee 
for  the  benefit  of  antecedent  creditors  had  no  bet- 
ter rights  than  those  creditors  themselves   would 
have  had,  the  contract  was  as  valid  against  him  as 
against  the  importer  himself."    The  case  is  illustra- 
tive of  the  fact  that  circumstances  may  exist  under 
which  an  unrecorded  chattel  mortgage  is  effective. 
These  occasions  are,  however,  rare.    The  bank  suc- 
ceeded, not  because  there  was  any  special  virtue,  in 
the  circumstances,  in  the  use  of  a  trust  receipt,  for 
there  was  none,  but  because  an  unrecorded  chattel 
mortgage  or  an  agreement  to  give  a  chattel  mort- 
gage would  have  been  equally  effective  in  the  case. 
We  repeat  that  it  was  not  a  proper  occasion  for  the 
use  of  a  trust  receipt  if,  by  its  use,  the  bank  ex- 

"See  Saiton  v.  Coiington,  supra,  footnote  22;  Federal  Bank- 
ruptcy Act  of  1898  5  70,  (1903)  32  Stat.  7?7,  U.  S.  Comp.  Stat 
(1916)  §  96S4;  In  re  Garcewich  (C.  C.  A.  1902)  IIS  Fed.  87 
(unrecorded   conditional    sale).  ,.     .     ^  ,  _      /-.  ._. 

"  See  discussion  in  Bell  v.  New  York  Safety,  etc.  Co.,  supra, 
footnote  12;  Wilson  v.  Esten.  supra,  footnote  49. 

51 


I 


pected  to  obtain  any  rights  which  it  could  not  have 
secured  by  an  unrecorded  chattel  mortgage  or  by 
an  agreement  to  give  security. 

The  next  case  of  importance  in  the  development 
of  the  law  of  trust  receipts  was  Moors  v.  BirdJ' 
It  indicates  that  responsibilities  as  well  as  rights 
may  grow  out  of  the  use  of  a  trust  receipt.    The 
defendant  had  made  a  contract  with  the  importer 
for  the  purchase  of  paper,  the  price  being  based  up- 
on the  cost  of  the  paper  to  the  importer.    Upon  the 
arrival  of  the  goods,  the  documents  were  turned 
over  to  the  importer  by  the  plaintiff  (the  banker) 
upon  a  trust  receipt  and  delivery  made  to  the  de- 
fendant.   The  importer  handed  the  invoices  to  the 
plaintiff  and  the  defendant  made  payment  direct 
to  him,  the  plaintiff  having  no  knowledge  of  the 
contract  of  sale  between  the  importer  and  the  de- 
fendant.    Through  a  secret  arrangement  made  by 
the  importer,  the  shipper  rebated  to  the  importer  a 
portion  of  the  price  which  was  fictitiously  increased 
without  the  knowledge  of  the  plaintiff,  thus  de- 
frauding the  defendant.     The  defendant  claimed 
the  right,  after  discovery,  to  deduct  the  amount  of 
this  loss  from  an  amount  later  to  be  paid  to  the 
plaintiff  as  a  result  of  a  later  transaction  between 
the  same  parties,  upon  the  ground  that  the  first 
overpayment  was  made  as  a  result  of  a  mistake  of 
fact.    The  plaintiff  had  turned  over  to  the  importer 

"  (1906)   190  Mass.  400,  77  N.  E.  643. 

52 


1 


r 


all  sums  in  excess  of  his  advances.  His  agree- 
ment with  the  importer,  however,  had  given  him  a 
right  to  apply  such  excess  against  any  debt  owing 
to  him  by  the  importer.  The  court  held  that  the 
plaintiff  was  owner  of  the  goods  and  that  the  sale 
was  made  by  him  to  the  defendant  in  pursuance  of 
the  importer's  contract ;  that  as  the  defendant  had 
under  mistake  paid  more  than  was  really  due 
under  this  contract,  he  could  later  reclaim  or  recoup 
it  from  the  plaintiff,  since  the  plaintiff  was  not  the 
importer's  agent  in  receiving  payment  but  had  a 
right  to  retain  the  proceeds  as  such  as  against  the 
obligations  of  the  importer  to  him;  that  the  im- 
porter had  a  mere  contract  right  to  receive  from  the 
plaintiff  any  surplus  that  might  remain  after  the 
payment  of  his  obligations.  The  result  of  this  case 
seems  open  to  question.  Was  not  the  buyer  estopped 
from  recovering  the  overpayment  from  the  banker 
who  was  entirely  innocent,  because  of  the  change 
which  had  taken  place  in  his  position  after  such  pay- 
ment upon  his  delivery  of  the  balance  to  the  im- 
porter ? 

In  re  E.  RebouUn  Fils'^  squarely  raised  the  ques- 
tion of  the  effect  of  a  trust  receipt  in  a  bankruptcy 
case  in  the  District  Court  of  New  Jersey.  The  bank 
sought  to  repossess  itself  of  the  goods  or  their  iden- 
tifiable proceeds  from  the  trustee  in  bankruptcy.  He 
resisted  on  the  ground  that  the  transaction  was 


i 


^  Supra,  footnote  16. 


53 


\i 


either  a  conditional  sale  or  a  chattel  mortgage  within 
the  terms  of  the  recording  acts.  The  court  rejected 
this  view  and  directed  the  delivery  of  the  goods  and 
their  proceeds  to  the  bank.  The  trust  receipt  thus 
obtained  explicit  recognition  in  the  federal  courts 
in  bankruptcy.  If,  therefore,  they  constitute  a 
species  of  chattel  mortgage,  such  species  is  distin- 
guished from  the  species  ordinarily  required  to  be 
recorded. 

The  fiduciary  nature  of  the  obligation  growing 
out  of  the  trust  receipt  was  recognized  in  In  re 
Coe}""  In  this  case,  the  bankrupts  had  misappro- 
priated the  proceeds  of  the  goods  received  by  them 
under  trust  receipt.  It  was  held  that  the  bank  could 
prove  its  claim  against  the  estate  of  the  partner- 
ship for  the  amount  of  the  unpaid  debt  represented 
by  its  advances,  and  that  it  could  also  prove  claims 
against  the  individual  estates  of  the  partners 
founded  at  its  election  in  tort  or  quasi-contract, 
based  upon  the  misappropriation  of  the  bank's  prop- 
erty.®^ 

This  case  suggests  that  the  persons  responsible 
for  the  misappropriation  thereby  made  themselves 
liable  to  criminal  prosecution  for  embezzlement  or, 
in  those  states  where  by  statute  this  crime  is  included 


745. 


(D.  C.    1909)    169  Fed.    1002,  aff'd   (C.   C.  A.   1910)    183   Fed. 
*^  Accord,  In  re  W.  S,  Kuhn  &  Co.   (D.  C.  1917)  241  F#<1    oic. 

A^'l9ilf-18rFU'^61h'^-   ^'  ^'^^'''''  ^-  ^-   ^-  ''''^'  ^^-    <C.   C. 

54 


in  the  definition,  for  larceny.  And  such  a  conclu- 
sion would  appear  to  be  sotmd.®^  This  case  is  criti- 
cised in  the  Columbia  Law  Review,®"  but  such 
criticism  would  not  be  applicable  to  a  conviction  re- 
sulting from  a  trust  receipt  situation.®*  No  in- 
stance of  a  criminal  conviction  in  such  a  case  has, 
however,  come  to  the  writer's  notice.  Specific 
statutes  have  been  adopted  in  at  least  two  states  im- 
posing severe  penalties  for  the  violation  of  the  ob- 
ligations of  a  trust  receipt.®** 

During  the  past  fifteen  years,  substantially  all  of 
the  litigation  with  respect  to  trust  receipts  has  taken 
place  in  the  federal  courts  in  connection  with  bank- 
ruptcy proceedings  or  equity  receiverships.  Charor- 
vay  &  Bodvin  v.  New  York  Silk  Mfg.  Co}  was  one 
of  the  latter  kind.  The  bank  in  that  case,  after  a 
contest  in  Pennsylvania,  recovered  all  of  the  goods 
and  their  proceeds  which  could  be  identified  and  then 
presented  a  claim  against  the  estate  for  the  de- 
ficiency. The  receiver  vigorously  contested  on  the 
ground  that  the  transaction  was  a  conditional  sale 
^  and  that  the  retaking  had  exhausted  the  bank's 
rights.^     The  opinion  clearly  points  out  the  fallacy 


{ 


»  See,  e.  g..  People  ex  rel.  Zotti  v.  Flynn  (1909)  135  App.  Jhw. 
276,   120  N.  Y.   Supp.  511. 

■•(1921)    21    Columbia  Law   Rev.    517. 

"On  civil  arrest  also,  see  Moffatt  v.  Fulton  (1892)  132  N.  Y. 
507,  30  N.  E.  992. 

»  Md.   Gen.  Laws  art.  27,  §  119;  La.,  Laws  1914,  No.  9. 

*  (D.  C.   1909)    170   Fed.  819. 

*Earle  v.  Robinson  (1895)  91  Hun  363,  63  N.  Y.  Supp.  178, 
aff'd   (1898)   157  N.  Y.  683,  51  N.  E.   1090. 

55 


of  this  position  and  asserts  emphatically  that  the 
bank  held  a  security  title  as  collateral  to  the  prin- 
cipal obligation, 

A  corollary  of  this  last  case  is  presented  in  In  re 
Perlhefter*    This  is  a  case  of  a  domestic  transac- 
tion and  while  the  name  trust  receipt  does  not  ap- 
pear, the  situation  and  the  agreement  used  were 
similar.    A  trust  receipt  would  have  been  entirely 
appropriate.    The  goods  were  delivered  to  the  bank 
under  an  agreement  reserving  title,  but  giving  power 
of  sale  accompanied  by  the  obligation  to  turn  over 
the  proceeds  to  the  bank  until  the  advance  was  re- 
paid.   These  proceeds  were  turned  over  to  the  bank 
within  four  months  of  the  filing  of  the  petition  in 
bankruptcy  and  the  question  was  whether  these  pay- 
ments constituted  preferences.    The  court  held  that 
they  did  not.     It  said  very  pertinently*  "it  is  quite 
obvious  that  the  contract  was  in  the  nature  of  a 
mortgage,  and  not  of  pledge,  for  title  was  reserved 
to  the  bank"  and  pointed  out  that  under  the  cir- 
cumstances a  chattel  mortgage  would  not  have  been 
invalid.    This  case  is  interesting  because  it  did  not 
seem  necessary  to  the  court  to  adopt  the  usual  in- 
definite language  regarding  the  nature  of  the  trans- 
action.    Let  us,'  follow  its  reasoning,  however,  a 
little  further.    If  the  payment  of  proceeds  was  not 
a  preference,  it  must  have  been  because  the  bank 


4  JB:.  ^  "*°>   ^77  Fed.  299. 
*lb%d.,   p.   303. 


56 


< 


had  a  proprietary  interest  in  such  proceeds  by  which 
it  was  entitled  to  receive  them,  even  as  against  the 
creditors  of  the  bankrupt.  In  other  words,  if  such 
proceeds  had  remained  in  the  bankrupt's  hands  and 
were  identifiable  as  such,  the  bank  could  have  re- 
claimed them  from  the  receiver  or  trustee.  Cases 
already  cited  support  this  conclusion.  But  had  this 
been  the  situation,  the  transaction  would  have  been 
no  less  "in  the  nature  of  mortgage."  In  other 
words,  the  case  is  authority  for  our  view  that  the 
true  trust  receipt  is  a  variety  of  chattel  mortgage  to 
which  the  ordinary  rules  are  held  not  to  apply.  The 
special  or  exceptional  law  with  respect  to  a  trust 
receipt  is  anomalous  but  is  justified  for  reasons 
already  stated.  When  we  get  away  from  the  special 
facts  where  a  trust  receipt  can  be  properly  used,  we 
find  the  ordinary  rules  applied  as  to  chattel  mort- 
gages.*' 

In  In  re  Cattus,^  the  Circuit  Court  of  Appeals 
definitely  settled  the  law  of  trust  receipts  in  the  Sec- 
ond Circuit  in  accord  with  the  foregoing  authorities 
and  permitted  the  bank  to  reclaim  the  property  de- 
livered under  trust  receipt  from  the  trustee  in  bank- 
ruptcy.   Its  language  is  decidedly  interesting^ :  "The 

»See  In  re  Carl  Dernberg  &  Sons,  Inc,  (1921)  66  N.  Y.  L.  J. 
1200*  aff*d  282  Fed.  816,  see  also  In  re  Fountain  282  Fed.  816;  In 
re  Cullen,  282  Fed.  902;  In  re  Gerstman  (C.  C.  A.  1907)  157  Fed. 
549;  Copeland  v.  Barnes  (1888)  147  Mass.  388,  18  N.  E.  65;  Amer- 
ican &  British  Sec.  Co.  v.  A.  &  B.  Mfg.  Corp.  (D.  C.  1921)  275  Fed. 
121;  Bell  v.  New  York  Safety  Steam  Power  Co.  (D.  C.  1910)  183 
Fed.   274. 

•  (C.   C.  A.    1910)    183  Fed.   733. 

»/&«.,  p.   735. 

57 


purpose  of  the  parties,  describe  the  trust  receipt  as 
you  will,  was  to  keep  the  title  to  the  goods  in  the 
bankers  until  their  acceptances  for  the  price  of  the 
goods  were  paid.    The  courts,  without  always  de- 
fining exactly  what  the  relation  between  the  parties 
IS  or  always  defining  it  in  the  same  way,  still  are 
astute  to  protect  the  rights  of  the  banker  in  such 
^se.  ...  It  would  be  most  inequitable  that  the 
bankrupt  or  his  trustee  should  escape  from  the  per- 
formance of  this  obligation  for  the  benefit  of  any 
one  except  a  bona  fide  purchaser  for  value  or  cred- 
itors protected  by  statute."  « 

The  law  was  shortly  afterward  settled  in  the 
Third  Circuit  by  the  decision  in  Century  Throwing 
Co.  V.  MuUer.^    The  banker  had  delivered  the  doc- 
uments for  the  raw  silk  imported  to  the  importer 
under  trust  receipt  giving  power  of  sale.    The  im- 
porter wished  to  have  it  thrown.    Throwsters  were 
by  statute  given  a  lien  for  their  claims  on  silk  in 
their  hands.    They  already  held  thrown  silk  of  the 
importer  upon  which  they  claimed  payment  and 
which  he  wished  to  release.     He  consequently  de-    ' 
ivered  the  silk  in  question  to  the  throwsters  to  be 
thrown  and  agreed  that  they  should  have  a  lien  upon 


the'S,u^"  ^'idf  ^teVuslie  iStend  Ah '.'".>   ^22  Fed.   S3.   56. 
the  conduct  of  the  parties  coSsthut^,  '.w»  *,'''*'   documents  and 

58 


< 


it  for  their  prior  claim  in  consideration  of  their  re- 
leasing the  silk  already  thrown,  which  they  did. 
They  then  proceeded  to  throw  the  silk  delivered 
under  trust  receipt  (of  which  they  appear  to  have 
been  ignorant).     After  the  bankruptcy  of  the  im- 
porter, the  banker  tendered   the  amount  due  the 
throwsters  for  throwing  the  particular  silk,  but  they 
refused  to  deliver,  claiming  a  lien  for  the  prior 
debt.    The  banker  then  sued  in  trover.    The  banker 
had  already  recovered,  by  order  of  the  court,  such 
trust  receipt  silk  as  was  held  by  the  receiver.    The 
language  of  the  court  is  so  illtuninative  of  the  ac- 
cepted view  that  we  shall  quote  at  some  length: 
"The  customary  character  of  the  transaction  is  at- 
tested, not  only  by  the  record  before  us,  but  by  the 
judicial  notice  elicited  in  many  modem  cases  more 
or  less  similar  to  the  present  one.  .    .    .   The  exi- 
gencies of  trade  and  commerce  have  caused  many 
exceptions  to  be  made  to  the  rigid  rule  founded  on 
the  policy  underlying  the  Statute  of    Frauds,  by 
which  the  divorce  of  title  from  possession  is  de- 
clared either  evidence  of  fraud  or  to  be  fraudulent 
per  se.  .    .    .  The  law  has  long  been  settled  that 
such  title  and  ownership  [of  the  banker]  will  be 
recognized,  so  far  as  they  are  necessary  to  the  se- 
curity they  were  intended  to  give  for  the  payment 
of  the  purchase  money  of  the  goods  bailed,  and 
this,  although  a  dishonest  bailee  is  thereby  enabled, 
by  violating  his  contract  of  bailment,  to  avail  him- 

59 


self  of  such  possession  to  represent  the  property  as 
his  own  and  thus  practice  a  fraud  on  third  persons 
with  whom  he  deals  in  respect  thereto.    But  such 
cases  are  an  exception  to  the  ancient  rule  founded 
on  the  policy  of  the  Statute  of  Frauds.  .         The 
courts  have  not  attempted  to  define  exactly  what 
the  relation  between  the  credit  lending  banker  and 
the  merchant  is,  as  to  the  goods.  ...  It  is  hardly 
necessary  to  add  that  where,  under  a  contract,  de- 
hvery  of  possession  without  transfer  of  title  or 
ownership  is  consistent  with  the  honest  and  Wti- 
ttiate  purpose  of  the  parties  to  the  contract,  and 
where  the  real  owner  is  not  estopped  to  assert  his 
title  by  conduct  fraudulent  or  otherwise,  his  title 
cannot  be  divested  by  anything  done  by  the  one  in 
possession,  in  fraud  of  or  inconsistent  with  such 
contract       And  the  court  adds,  by  way  of  estab- 
lishing the  anomaly:  "We  find  no  ground  upon 
which  we  can  hold  that  the  transaction  here  in 
question  was  tantamount  to  a  mortgage,  equitable 
or   otherwise."     Judgment    for    the    banker    was 
affirmed." 


KUlian  Mfg.  C^  (D.  C  ms/^'no  T5*'li*^'°ir  *'*''  «"»>.  In  re 
established  in  the  1st  Circuit  U^,'  "*'*■  ^^  Principte  is  alio 
(C.   C.  A.   191S)   218   Fed    7fio    ff!   ■^•'''^„^-    ^ass.  Hide  C^ 

203  App.  Div.  108  (1922).       ""'"'^  ^«"*  v.  New  York  Dock  Co. 

60 


iaM>ilaMMh„itjmiil^im^ 


As  a  recc^nition  of  the  general  doctrine,  the 
Century  Throwing  case  is  very  strong.  Let  us  now 
look  at  some  of  its  implications.  A  release  of  prop- 
erty held  in  pledge  or  subject  to  lien  in  considera- 
tion of  a  delivery  of  other  property  to  be  held  sub- 
ject to  the  same  lien  has  uniformly  been  held  to  be 
present  consideration  for  such  lien  or  pledge.^^  It 
matters  not  that  the  first  pledge  or  lien  existed  by 
statute — ^the  second  pledge  by  contract  makes  the 
'^  property  subject  to  the  same  lien  which  formerly 
covered  the  first.  It  must  be  said,  therefore,  that 
the  throwsters  were  bona  fide  pledgees  for  value  of 
the  imported  silk  as  security  for  their  earlier  debt. 
The  decision,  therefore,  means  that  in  New  Jersey 
at  least  a  person  entrusted  with  a  power  to  sell  (we 
may  call  him  a  factor)  cannot  make  a  valid  pledge 
or  mortgage.  Such  is  the  general  rule,  not  only  in 
New  Jersey,  but  elsewhere,  in  the  absence  of  a  fac- 
tors* act  or  special  legislation.^^  In  other  words,  if 
the  importer  had  pledged  the  property  with  another 
bank  by  delivery  of  the  silk,  or  (in  the  absence  of 
the  Bills  of  Lading  Act)  of  the  bill  of  lading  there- 
for, as  security  for  a  present  loan,  such  bank  would 
have  been  unsuccessful  in  retaining  the  goods  as 
against  the  claim  of  the  banker  who  held  the  trust 
receipt.    We  may  inquire,  therefore,  why  the  banker 


( 


^Blydenstein  v.  New  York  Sec.  &  Tr.  Co,  (C.  C.  A.  1895)  67 
Fed.   469. 

^Towne  v.  Goldman  (1902)  26  N.  J.  L.  J.  47;  see  also  dtationi 
in  (1921)  25  C.  J.  351. 


61 


i£ 


-r-s-— ^  ••^^7' 


m  this  case  tendered  to  the  throwsters  the  amount 
of  their  bill  for  throwing  the  particular  silk.  The 
answer  is  doubtless  to  be  found  either  in  the  New 
Jersey  Statute  giving  throwsters  of  silk  a  lien  for 
the  value  of  their  service  or  in  a  quasi-contractual 
obligation  based  on  the  enhancement  in  value  due  to 
the  throwsters'  service. 


Factors'  Act:    It  is,  as  we  have  said,  the  com- 
mon law  rule  that  a  factor  for  sale  cannot  make  a 
valid  pledge.    This  rule  has,  however,  in  New  York 
and  Massachusetts  been  modified  by  factors'  acts." 
The  decision  last  discussed  should,  therefore,  have 
been  otherwise,  had  the  case  arisen  under  the  law 
of  New  York  or  of  Massachusetts  (or  in  England 
where,  however,  the  trust  receipt  is  not  in  common 
use  although  it  is  sometimes  used  under  the  name 
of  "Letter  of  Lien"  or  a  similar  title)."    Unless, 
therefore,  a  similar  modification  of  the  common  law 
rule  is  effected  by  some  other  piece  of  legislation— 
a  question  which  we  shall  immediately  consider— 
it  may  be  said  that  the  protection  afforded  by  a  trust 
receipt  is  somewhat  less  in  New  York  and  Massa- 
chusetts than  in  other  states  by  reason  of  the  fact 
Aat  the  factors'  acts  in  those  two  states  uphold  a 


-See  Bly,Unstein  v.  Nev,  York  5?r.  S^fr^ cV.; suPra.  footnote  IL 

62 


bona  fide  pledgee  or  mortgagee  as  against  the  banker 
who  holds  the  trust  receipt,  whereas  in  other  states 
such  bona  fide  pledgee  or  mortgagee  acquires  no 
rights  as  against  the  holder  of  the  trust  receipt.  In 
this  connection,  it  will  be  recalled  that  we  have 
already  referred  to  Ohio,  Illinois  and  a  few  other 
states,  with  special  reference  to  the  form  and  effect 
of  the  recording  acts  in  those  states.^" 

Uniform  Conditional  Sales  Act:  "§  1.  In 
this  Act  'Conditional  Sale'  means  (1)  any  contract 
for  the  sale  of  goods  under  which  possession  is  de- 
livered to  the  buyer  and  the  property  in  the  goods 
is  to  vest  in  the  buyer  at  a  subsequent  time  upon  the 
payment  of  part  or  all  of  the  price,  or  upon  the 
performance  of  any  other  condition  or  the  happen- 
ing of  any  contingency;  or  (2)  any  contract  for  the 
bailment  or  leasing  of  goods  by  which  the  bailee  or 
lessee  contracts  to  pay  as  compensation  a  sum  sub- 
stantially equivalent  to  the  value  of  the  goods,  and 
by  which  it  is  agreed  that  the  bailee  or  lessee  is  bound 
y  to  become,  or  has  the  option  of  becoming  the  owner 
of  such  goods  upon  full  compliance  with  the  terms 
of  the  contract."  From  what  has  already  been  said 
about  the  trust  receipt  in  relation  to  conditional 
sales,  it  is  clear  that  it  does  not  come  within  the 


\ 


"  But  a  promise  by  the  signer  of  the  trust  receipt  given  to 
another  lender,  to  repay  him  out  of  the  proceeds  of  trust  receipt 
property,  is  not  enforceable  as  against  the  holder  of  the  trust 
receipt.  Munroe  v.  Bonanno  (1893)  31  Abb.  N.  C.  1,  28  N.  Y. 
Supp.   375. 

63 


mti 


I 


If 


"-Vj^l 


iirst  part  of  this  definition.  As  to  the  second  part, 
the  same  is  equally  clear  if  it  be  noted  that  the  pay- 
ment must  be  "as  compensation"  for  the  goods. 
This  statute,  therefore,  has  no  bearing  on  trust  re- 
ceipts except  as  it  may  be  adopted  in  a  jurisdiction 
like  Connecticut  which  has  judicially  defined  the 
trust  receipt  as  a  conditional  sale.  As  yet  it  has 
not  been  adopted  in  any  such  jurisdiction.  If  it 
should  be  so  adopted,  we  may  anticipate  that  the 
court  will  find  a  way  to  bring  its  decisions  regarding 
trust  receipts  into  line  with  the  general  current  of 
authority. 

Uniform  Bills  of  Lading  Act  :  This  has  been 
adopted  in  more  than  twenty  jurisdictions.  Among 
its  provisions  are  the  following: 

"§31.  A  negotiable  bill  may  be  negotiated  by 
any  person  in  possession  of  the  same,  however  such 
possession  may  have  been  acquired  if,  by  the  terms 
of  the  bill,  the  carrier  undertakes  to  deliver  the 
goods  to  the  order  of  such  person,  or  if  at  the  time 
of  negotiation,  the  bill  is  in  such  •£ orm  that  it  may 
be  negotiated  by  delivery."  ^® 

"§32.  A  person  to  whom  a  negotiable  bill  has 
been  duly  negotiated  acquires  thereby:  (a)  Such 
title  to  the  goods  as  the  person  negotiating  the  bill 
to  him  had  or  had  ability  to  convey  to  a  purchaser 
in  good  faith  for  value  and  also  such  title  to  the 


"E.  g.,  if  it  is  endorsed  in  blank— see  S  29. 

64 


goods  as  the  consignee  and  consignor  had  or  had 
power  to  convey  to  a  purchaser  in  good  faith  for 

value. 

"§53.     .     .     .     'Purchaser'  includes  mortgagee 

and  pledgee.  'Value'  is  any  consideration  sufficient 
to  support  a  simple  contract.  An  antecedent  or 
pre-existing  obligation,  whether  for  money  or  not, 
constitutes  value  where  a  bill  is  taken  either  in 
satisfaction  thereof  or  as  security  therefor."  " 

This  Act  obviously  accomplishes  the  results  of 
the  factors'  act  in  so  far  as  bills  of  lading  are  con- 
cerned in  states  which  hitherto  have  had  no  factors' 
act.    It  would  not,  however,  had  it  been  the  law 
in  New  Jersey  at  the  time,  have  affected  the  result 
in  Century  Throwing  Co.  v.  Muller,^^  since  a  bill 
of  lading  was  not  involved  in  that  case.    It,  how- 
ever, goes  farther  than  the  factors'  act  by  including 
a  pre-existing  obligation  as  "value."    The  result 
is  that  if  a  banker  endorses  and  delivers  a  negotiable 
bill  of  lading  to  the  importer  upon  any  sort  of 
y  trust  receipt,  whether  it  be  limited  to  an  entry  of 
the  goods  in  the  custom  house,  to  warehousing,  or 
whether  it  broadly  gives  the  right  to  manufacture 
and  sell,  he  puts  it  in  the  power  of  the  importer  to 
mortgage,  pledge  or  sell  the  bill  of  lading  or  to 
deliver  it  in  payment  of  or  as  security  for  an  exist- 


"  See  also  §S  38,  39.  This  definition  of  "value"  has  not  been 
adopted  in  New  York  in  its  enactment  of  the  Bills  of  Lading  Act 
N".   Y.  Pers.  Prop.   Law  §   239. 

^  Supra,  footnote   9. 

65 


■-m 


t^ 


ing  obligation.  He  cannot  recover  it  from  any  such 
transferee  in  good  faith.  Obviously  this  consider- 
ably impairs  the  security  of  the  banker  in  dealing 
with  bills  of  lading.!®  The  banker  can  doubtless 
still  recover  the  bill  of  lading  from  the  importer 
or  his  receiver  or  trustee.  The  Act,  of  course, 
ceases  to  be  pertinent  as  soon  as  the  bill  of  lading 
is  spent,  as  it  does  not  affect  transfers  otherwise 
than  by  means  of  the  document.  It  also  has  no 
effect  in  cases  where  non-negotiable  bills  of  lading 
are  used. 

Uniform  Warehouse  Receipts  Act  :  This  Act 
has  been  adopted  in  more  than  forty  jurisdictions. 
Its  provisions  are  similar  to  those  quoted  above  in 
connection  with  the  Bills  of  Lading  Act,  and  its 
definition  of  "value"  is  the  same.^^  In  fact,  the 
legal  eflFect  of  these  two  statutes  is  to  give  to  bills 
of  lading  and  warehouse  receipts  the  quality  of 
negotiable  instruments,  which  they  have  long  pos- 
sessed in  practice  to  a  much  more  limited  extent. 
This  has  the  necessary  effect  of  making  the  pos- 


»See  WiUiston,  Sales   (1909)    9   437;   see  also  Roland  M,  Baker 
Co.  y   Brown  (1913)   214  Mass.   196,  100  N.  E.  1025      In  that  cas7 

S^thf  M^r  ^^'^%^°iS^5>  indorsed  and  delivered  the  biU  of  lading 
to  the  Massadiusetts  Hide  Co.  against  a  trust  receipt.  That  con- 
cern wrongfully  transferred  the  biU  of  lading  to  the  Columbia  Co 
tn  payment  of  an  existing  obligation.  The  Columbia  Co.  "ctcd  in 
good  faith.  It  later  transferred  the  biU  of  lading  to  the  plaintiff 
S^  tr««f' '"^-^  ^^J*''*  had  knowledge  of  defendlnt's  claim  1Sd«? 
?,?!  tSfl  ""tr^  ^?!,  ^'^^^r  H^^  *^^*»  ^»  ^^^  Columbia  Co.  obtSnS 
u  i!J*l^t!   t^c^Jmowledge   of   the    plaintiff   was   not   material   and   h 

St  tenk^r."*^''  ""^  '^"^  ^^""'^  *^  ^"  ^^^  ^«  agai^t  the  drfld! 
*  Sec  55*  37-43,  47,  48,  58. 

66 


V 


session  of  the  document,  when  combined  with  its 
form  and  apparent  ownership,  the  all-important 
fact.  It  is  now  possible  for  a  dishonest  bailee  of 
goods  represented  by  these  negotiable  documents 
of  title,  to  cause  injuries  to  his  principal  or  bailor 
by  negotiating  the  documents  when  he  could  not 
cause  such  injury  by  the  delivery  of  the  goods 
themselves.  The  documents  may  be  transferred  ef- 
fectively in  ways  that  would  be  quite  ineffective  if 
employed  with  reference  to  the  goods  themselves. 
The  documents  are,  therefore,  more  than  mere 
representatives  of  the  goods.  For  example,  in  New 
York  a  factor  cannot  pledge  the  goods  themselves  as 
security  for  an  antecedent  obligation,  but  he  can  do 
so  if  he  delivers  a  negotiable  warehouse  receipt 
therefor  which  is  regular  on  its  face.  On  the  other 
hand,  a  thief  cannot,  by  obtaining  a  bill  of  lading 
or  warehouse  receipt  for  the  stolen  goods,  thereby 
enable  an  honest  purchaser  to  retain  them  as  against 
the  true  owner.^^ 

An  interesting  decision  in  connection  with  this 
statute  is  In  re  Richheimer,^^  already  referred  to  in 
connection  with  the  recording  acts.  Imported 
coffee  was  delivered  tmder  a  trust  receipt.    The 


»  Commercial  Bank  v.  Canal  Bank  (1916)  239  U.  S.  520,  525-26, 
36  Sup.  Ct.  194,  infra;  Mechanics  &  T.  Bk.  v.  F.  6*  M.  Bk,  (1875) 
60  N.  Y.  40;  Farmers  &  M.  Bk.  v.  Atkinson  (1878)  74  N.  Y.  587; 
Hentg  V.  Miller  (1883)  94  N.  Y.  65;  Thacher  v.  Moors  (1883)  134 
Mass.  156;  Soltau  v.  Gerdau  (1890)  119  N.  Y.  380;  Williston,  op. 
cit.   5  421. 

«  (C.   C.  A.  1915)   221  Fed.  16. 

67 


mimM 


'  \i.  •   -^  ■-; 


11 


importer  placed  most  of  it  in  warehouse  and  pledged 
the  negotiable  warehouse  receipts  as  security  for 
present  loans.    There  is  no  factors'  act  in  Illinois 
where  the  case  arose.    The  court  decided  against 
the  banker  holding  the  trust  receipt.    The  decision 
appears  to  rest  as  to  a  large  part  of  the  goods  upon 
the  Warehouse  Receipts  Act.     If  so,  the  question 
arises  whether  the  importer  was  authorized  to  place 
the  coffee  in  warehouse  and  to  take  negotiable  re- 
ceipts therefor  and  whether  by  so  doing  he  could 
put  the  banker  in  a  worse  position  than  he  occupied 
when  he  delivered  the  goods.    But  further  examin- 
ation indicates  that  the  Warehouse  Receipts  Act 
was  not  necessary  to  the  decision.     It  appears  that 
seven  bags  of  coffee  were  still  in  the  importer's 
hands  against  which  no  warehouse  receipt  had  been 
issued.    The  court  refused  to  return  these  to  the 
banker,  and  held  that  the  trust  receipt  was  invalid 
in  Illinois  as  being  contrary  to  its  public  policy 
and  the  Recording  Act.    This  is  the  key  to  the 
decision.     It  follows  that  the  banker  could  not  re- 
cover any  of  the  coffee  and  consequently  that  the 
taking  of  the  warehouse  receipts  and  the  pledge  of 
these  documents  did  him  no  additional  injury.     He 
could  not  have  recovered  the  coffee,  even  if  it  had 
remained  in  the  hands  of  the  importer.     The  ques- 
tion of  the  importer's  authority  to  warehouse  the 
goods  and  to  take  negotiable  warehouse  receipts  to 

68 


his  own  order,  therefore,  is  not  necessarily  answered 
by  this  decision.^* 

Another  important  decision  is  Commercial  Bank 
v.  Canal  Bank,^^  reversing  In  re  DreuU  &  Co}^ 
In  this  case,  the  bankrupt  having  already  received 
bills  of  lading,  pledged  them  to  the  Canal  Bank. 
In  Louisiana  a  pledge  carries  title ;  the  transaction, 
therefore,  amounted  to  a  chattel  mortgage.  It 
should  be  noted  at  the  outset  that  the  facts  are 
not  such  as  lay  the  foundation  for  the  distinctive 
doctrine  of  the  trust  receipt  under  principles  al- 
ready pointed  out,  since  the  title  did  not  pass  to 
the  bank  from  a  third  person  but  directly  from  tKe 
debtor.  This  fact  was  not  apparently  noted  by 
the  court.  The  Canal  Bank,  however,  returned  the 
bills  of  lading  against  a  trust  receipt  giving  power 
of  sale  and  also  power  to  warehouse  the  goods. 
The  bankrupt  then  warehoused  the  goods  (cotton) 
after  having  had  it  picked,  and  took  negotiable 
warehouse  receipts  to  its  own  order  which  it  pledged 
to  the  Commercial  Bank.  It  later  again  withdrew 
the  warehouse  receipts  against  a  similar  trust  receipt. 
It  then  withdrew  the  goods  which,  upon  the  bank- 
ruptcy, passed  into  the  possession  of  the  trustee. 
The  question  is  not  whether  the  trustee  can  retain 


\ 


^The  trust  receipt  in  this  case  was  delivered  in  Louisiana  and 
the  bankers  contended  that  the  transaction  was  governed  by  the 
law  of  that  state.  See  Mershon  v.  Moors  (ia90)  76  Wis.  502,  45 
N.  W.   95.     The  court,   however,  rejected  this  contention. 

**  Supra,   footnote  21. 

*  (C.  C.  A.  1914)  211  Fed.  337;  (D.  C.  1913)  205  Fed.  568. 

69 


rtMM 


ifeta 


the  property  as  part  of  the  estate,— the  court  con- 
cedes that  he  cannot,— (that  in  Louisiana  the  holder 
of  a  trust  receipt  would  be  protected  as  against  the 
trustee  in  bankruptcy  seems  to  be  settled  by  In  re 
Dreuil  &  Co.y^  it  is  rather  as  to  which  bank  is 
entitled  thereto.^^ 

It  is  clear  that  had  the  bankrupt  re-pledged  the 
bills  of  lading  to  the  Commercial  Bank  after  re- 
ceiving them  against  a  trust  receipt  from  the  Canal 
Bank,  the  former  would  have  been  protected.    The 
court  found  that  the  bankrupt  was  authorized  by 
the  Canal  Bank  to  take  negotiable  warehouse  re- 
ceipts for  the  goods  which  it  would  hold  subject  to 
the   same   obligations  which  covered  the  bills   of 
lading  and  that,  while  the  negotiation  of  these  re- 
ceipts constituted  a  wrong  on  the  part  of  the  bank- 
rupt toward  the  Canal  Bank,  nevertheless,  the  bona 
fide  pledgee  (the  Commercial  Bank)  acquired  there- 
by a  valid  title  in  accordance  with  the  provisions  of 
the  Warehouse  Receipts  Act.    It,  therefore,  awarded 
possession  of  the  goods  to  the  second  pledgee.     This 
conclusion  is  inevitable  from  the  facts  found  and 
is  the  same  as  would  have  resulted  had  the  bills 

^T^^^^^'  footnote  25;  see  The  Trust  Receipt  as  Security  I  fl922^ 
^^ti^TU^^'J^'tJ^^'^  ^r  i^^*  t^^^  P'  ^  discussion  of  this  case!  ^ 
,vr  ^/^"'l  ^°u^  farther  than  is  necessary  on  this  point  beine 
nfluenced  either  by.  the  admission  of  the  trustee  or  the  fact  that 
m  Louisiana  an  ordinary  chattel  mortgagee  (pledgee)  would  under 
even    these    circumstances,    be    protected       The    thilt    receipt    easel 

ncS  U^'^'in'thf^  *^.l^'   ??^r  *""?J  'r^^^'  situation   which   dM 
.^J  V     *     .*  r     ?^*^-    J-^'    ^*    ^^    ^^^^   D ember g    &   Sons,    Inc 

70 


of  lading  themselves  been  re-pledged.  The  lower 
court  appears  to  have  decided  otherwise  upon  the 
ground  that  the  bankrupt  had  no  authority  to  take 
a  negotiable  warehouse  receipt  to  his  own  order. 
A  careful  reading  of  the  agreement  involved  seems 
to  leave  it  open  to  question  whether  it  was  not  the 
duty  of  the  bankrupt  to  store  the  goods  in  the  name 
of  the  Canal  Bank  and  consequently  whether  the 
Supreme  Court  was  correct  in  finding  that  the 
taking  of  negotiable  warehouse  receipts  to  the  order 
of  the  bankrupt  was  authorized.  The  agreement 
made  it  the  duty  of  the  bankrupt  to  deliver  any 
warehouse  receipt  to  the  bank  within  one  day  after 
receipt  and  apparently  limited  its  right  to  the  re- 
ceipt of  any  document  of  title  "for  account  of  the 
said  bank."  If  the  trust  receipt  had  expressly 
provided  that  any  warehouse  receipts  should  be 
taken  in  the  name  of  the  bank,  the  case  before  the 
Supreme  Court  would  have  presented  a  different 
question,  namely,  the  one  which  we  have  already 
raised. 

Let  us  look  at  it  from  the  standpoint  of  principle. 
Suppose,  in  a  proper  trust  receipt  case,  the  goods 
themselves  are  delivered  to  the  importer  with  power 
to  sell  to  a  named  buyer,  who  is  represented  as  being 
ready  at  once  to  take  under  a  contract  already  made. 
In  this  case,  a  warehousing  would  seem  to  be  out- 
side the  contemplation  of  the  parties.  The  taking 
of  a  negotiable  warehouse  receipt  to  the  order  of 

71 


^■rifa 


J&i 


i^ 


pi 


'.  if 


I 


the  importer  would,  therefore,  seem  to  amount  to 
a  conversion  of  the  property.  The  result  should 
be  that  a  pledgee  of  such  warehouse  receipt  would 
not  acquire  any  greater  rights  by  reason  of  receiv- 
ing such  document  than  he  would  have  acquired  by 
the  pledge  of  the  goods  themselves.^® 

If,  on  the  other  hand,  the  trust  receipt  gave  mere- 
ly the  power  to  sell  generally,  it  might  be  argued 
that  in  the  meantime  storage  must  be  contemplated 
as  a  reasonable  incident.    Even  so,  it  is  not  at  all 
necessary  that  a  negotiable  warehouse  receipt  should 
be  obtained  and,  in  view  of  the  fact  that  the  risks 
of  the  bank  are  increased  by  the  issue  of  such  a 
document,  it  would  seem  improper  for  the  importer 
to  do  so  without  the  express  consent  of  the  banker. 
The  same  may  be  said  of  a  trust  receipt  giving  ex- 
press power  to  warehouse.    In  view,  however,  of 
the  opinion  last  commented  upon,  it  seems  probable 
that  when  the  question  is  squarely  presented,  the 
holding  will  be  that,  if  the  power  to  warehouse  is 
expressed  or  implied,  the  taking  of  a  negotiable  re- 
ceipt in  the  name  of  the  importer  will  not  be  held  / 
to  be  a  breach  of  duty  on  his  part.     The  conse- 
quence will  be,  as  decided  by  the  Supreme  Court, 
that  a  bona  fide  pledgee  or  mortgagee  of  this  ware- 
house receipt,  whether  for  a  present  or  past  con- 
sideration, will  acquire  a  good  title.    A  purchaser 
as  such  will,  of  course,  be  protected. 

*  See  Mechanics  &  T.  Bk.  v.  F,  &  M.  Bk.,  supra,  footnote  21. 

72  ; 


i 


\ 


For  the  protection  of  the  banker,  therefore,  the 
trust  receipt  should,  in  view  of  the  Warehouse  Re- 
ceipts Act  and  this  decision,  contain  an  express 
provision  that  in  case  of  warehousing,  all  receipts 
must  be  issued  in  the  name  of  and  immediately 
delivered  to  the  banker  or  his  agent.  If  this  is  in- 
convenient, it  should  at  least  be  provided  that  only 
non-negotiable  receipts  be  taken  by  the  importer. 
These  provisions  will  not,  of  course,  afford  any 
protection  as  against  the  factors'  act ;  but,  apart  from 
that  act,  it  would  seem  that  the  taking  of  a  nego- 
tiable warehouse  receipt  by  the  importer  in  the  face 
of  such  a  provision  of  the  trust  receipt  would  be 
tortious  and  that  a  pledgee  or  mortgagee  thereof 
would  fall  without  the  scope  and  protection  of  the 
Warehouse  Receipts  Act.^® 

VI 

The  problem  of  identifying  the  goods  or  of  trac- 
ing their  proceeds  is  an  important  and  sometimes  a 
difficult  one.  In  certain  aspects,  it  is  distinct  from 
the  questions  which  we  have  already  considered.  It 
might  be  argued  since  the  property  of  the  claimant 
has  gone  to  the  general  enrichment  of  the  estate  of 
the  holder,  who  has  converted  it,  that  the  claimant 
should  be  allowed  an  equivalent  amount  in  prefer- 
ence to  general  creditors.  Such  a  view  has  at  times 
been  taken  in  various  jurisdictions,  but  is  opposed 

»  Moors  V.  Kidder  (1887)   106  N.  Y.  32,  12  N.  E.  818;  Mechanics 
&  T.  Bk.  V.  F.  d  M.  Bk.,  supra,  footnote  21. 

73 


t 


to  the  great  weight  of  authority.'"  It  is  undoubted- 
ly the  general  rule  that  the  burden  of  tracing  the 
fund  or  property  into  the  property  claimed  rests 
with  the  beneficiary  who  claims  it."  It  is  obvi- 
ously impossible  to  consider  the  problem  of  tracing 
the  goods  in  every  form  in  which  that  question 
may  be  raised.  We  will,  however,  consider  a  num- 
ber of  hypothetical  situations. 

(a)     The  question  often  arises  with  respect  to 
the  proceeds  of  property  sold  under  the  power  of 
sale  contained  in  the  trust  receipt.     Suppose  the 
purchase  price  has  not  yet  been  collected  from  the 
purchaser.    This  account  receivable  is  clearly  the 
proceeds  of  the  trust  receipt  property.    The  banker 
may  notify  the  buyer  of  his  rights  and  collect  such 
account  from  the  buyer,  just  as  he  could  retake  the 
proceeds  from  the  signer  of  the  trust  receipt.    If 
the  buyer  fails  or  refuses  to  recognize  or  protect 
the  banker's  rights,  he  becomes  directly  liable  to 
him  for  any  loss  caused  thereby.'^    A  buyer,  how- 
ever, who  purchases  from  a  signer  of  a  trust  receipt 
will  be  protected  if  he  has  paid  the  purchase  money   ' 

7ir;^"so*rCyrsiS  i^sZ  ''""•"'»   ^''-   C-   ^'02)    116   Fed.   715. 
«^?^*>^^'^  V.  Ballou   (1885)    114  U    S    ioa     c   c„^    r**    o^a 

(1874)    57  N.  Y.   34-  FirrtNJ  Rb      /  ?  L'^  CtHnnnati  v.  Kelly 

Banking  Co.  (19  1)  108  mJ.  79  7^ V^^  tITi  \  ^"'^'T^-  ^''-  * 
ing  because  it  was  thiit  W(\i  1.1-  \    ^?*  '***  =*«e  is  interest- 

not  app^r  to  hive  Wn  f-,"'^"^^  ^t?"""  mortgage  which  d(is 
made  no  claims  trtheornoiH?"'''!^:,.  ^'"  *"«»««  "^  bankrupt^ 
had  done  so  it  woSd  "y^m  t1,,f  h*?'  °«'J]iR¥'^  property.  If  ^ 
under  principles*  a^dTnth'^ieJ'lU^d/^fiss'r  '""  "^"^'"^ 

74 


to  him.'^  This  account  receivable  may,  however, 
have  been  pledged,  mortgaged  or  assigned  by  the 
signer  of  the  trust  receipt.  Such  a  pledge  or  mort- 
gage of  a  chose  in  action  is  not  subject  to  the  record- 
ing acts.  It  is  not,  however,  within  the  protection 
of  the  factors*  act  and  it  is  the  general  rule  that 
the  assignee  of  a  chose  in  action  takes  subject  to 
all  existing  equities.  Since  the  signer  of  the  trust 
receipt  was  a  trustee  of  this  account  for  the  benefit 
of  the  holder  of  the  trust  receipt,  the  pledgee, 
mortgagee  or  assignee  of  the  account  would  fail  in  a 
claim  thereto  as  against  the  holder  of  the  trust 
receipt. 

(b)  Suppose  the  signer  of  the  trust  receipt  has 
collected  the  purchase  price  and  instead  of  immedi- 
ately delivering  it  to  the  banker,  has  deposited  it 
in  his  own  bank  account,**  in  which  he  continues  to 
make  deposits  and  from  which  he  pays  out  by  check 
or  otherwise.  Obviously,  the  identity  of  the  money 
is  lost.  Nor  is  it  exactly  like  a  mingling  of  fungible 
goods,  for  the  depository  owes  a  debt  therefor  in- 
>  stead  of  holding  a  sum  of  money  belonging  to  the 
depositor.  Nevertheless,  it  has  a  certain  resem- 
blance to  a  mingling  of  fungible  goods.  Any  rules 
regarding  the  identity  of  the  funds  used  from  time 
to  time  are  largely  arbitrary — mere  presumptions. 
They  are,  nevertheless,  well  recognized.    What  is 

**  Brown  Bros,  &  Co,  v.   WUliam  Clark  Co,   (1900)   22  R.  I.  36. 
46  Atl.  239. 

^English  Bank  v.  Barr  (N.  Y.  1888)  31  Abb.  N.  C.  7. 

^  75 


'>- 


^- 


I    'I 


known  as  the  rule  in  Clayton's  Case  ^^  holds  that  in 
an  ordinary  bank  account,  money  is  presumed  to 
have  been  withdrawn  in  the  order  in  which  it  was 
deposited.  This,  however,  is  held  not  to  apply  to  a 
case  where  a  fiduciary  or  trustee  has  mingled  his 
own  funds  with  funds  belonging  to  the  trust  estate. 
He  can  hardly  be  heard  to  say  that  he  has  wrong- 
fully used  trust  funds  so  long  as  his  own  funds 
were  equally  available.  It  is  consequently  the  rule 
in  such  cases  that  he  is  presumed  to  have  used  his 
own  funds  in  preference  to  trust  funds.«*»  This  is 
the  rule  with  respect  to  the  proceeds  of  trust  receipt 
property.^^ 

(c)  Suppose,  however,  the  signer  of  the  trust 
receipt  has  also  deposited  in  the  bank  account  the 
proceeds  of  other  goods  covered  by  trust  receipts 
held  by  other  parties  and  has  withdrawn  so  much 
of  the  deposit  that  insufficient  remains  to  satisfy 
the  claims  of  all  holders  of  trust  receipts.  It  is 
obviously  unfair  to  say  that  he  shall  be  presumed 
to  have  withdrawn  the  property  of  one  trust  re- 
ceipt holder  in  preference  to  that  of  another.  Two 
courses  are  possible— either  to  divide  the  fund  pro-  ' 
portionately,  or  according  to  the  rule  in  Clayton's 
Cuse}^  A  proportionate  division  seems  more  just; 
but  this  presupposes  the  possibility  of  determining 


i 


"(1816)   1   Men  572. 

w  f**  ''^  ^?^\^'^  ^^^^  (1S79)   13  Ch.  Div.  696. 
"i«  re  MuUtgan,  supra,  footnote  30. 
"/»  re  Mulligan,  supra,  footnote  30. 

76 


the  proportions,  which  in  turn  requires  the  determi- 
nation of  the  amounts  belonging  to  each  holder  of 
trust  receipts  which  have  gone  into  the  fund.  This 
is  sometimes  impossible.  No  definite  rule  has  as  yet 
been  adopted  covering  this  situation.®^  But  the  ten- 
dency is  to  support  a  proportionate  distribution. 
The  rule  of  Clayton's  Case  rests  upon  a  mere  pre- 
sumption which  is  highly  unsatisfactory  in  the  cir- 
^  cumstances.  It  is  unfair  to  presume  that  there  was 
an  intention  of  wronging  one  beneficiary  rather  than 
the  other.  The  only  reasonable  view  is  that  the 
wrong  should  be  taken  to  have  been  inflicted  ratably 
on  each  and  that  any  unconverted  balance  should 
be  turned  over  to  them  in  proportion  to  their  origin- 
al interests.* 

(d)  Suppose  the  balance  of  the  account  is 
claimed  by  the  bank  in  which  it  is  deposited,  in 
whole  or  in  part,  under  a  lien  created  either  by  con- 
tract or  by  what  is  known  as  a  banker's  lien,  which 
is  really  a  right  of  set-off.  If  the  bank  has  already 
X  applied  any  portion  of  the  deposit  toward  the  pay- 
ment of  a  claim  which  is  due  without  knowledge 
of  the  claim  of  the  holder  of  the  trust  receipt,  it 
has  been  held  that  such  application  is  equivalent  to 
a  payment  by  the  depositor  out  of  the  f  und.*^     The 

^  In  re  Mulligan,  supra,  footnote  30;  Litchfield  v.  Ballou,  supra, 
footnote   31. 

^Meyers  v.  New  York  Co.  Nai.  Bk,  (1899)  36  App.  Div.  482, 
55  N.  Y.  Supp.  504;  London  &  River  Plate  Bk.  v.  Hanover  Nat. 
Bk,  (1899)  36  App.  Div.  487,  55  N.  Y.  Supp.  941.  This  was  a 
trust  receipt  case,  although  that  fact  docs  not  appear  from  the 
decision.  School  District  v.  First  Nat.  Bk.  (1869)  102  Mass.  174. 
^  *  An  interesting  note  on  this  point  will  be  found  in  23  Columbia 
Law  Review,  p.   567. 

77 


I) 

1 

t 


J  f 


IJ  j 


ii  i 


general  banker's  lien  applies  only  to  accounts  which 
are  already  due  and  payable.*^  It  is  held  further 
that  a  depositor  may  by  contract  give  the  bank  a  lien 
upon  the  deposit  for  the  pa3mient  of  obligations  not 
yet  due,*^  and  that  an  application  by  the  bank  when 
any  such  obligation  is  due  is  equivalent  to  payment 
by  the  depositor.  Whether  such  lien  is  effective 
as  against  the  holder  of  the  trust  receipt  before 
application  is  actually  made  is  another  question.  It 
should  apparently  be  determined  on  the  analogy  of 
rules  relating  to  collateral  security.  As  to  obliga- 
tions incurred  coincident  with  or  subsequent  to  the 
deposit,  and  in  reliance  thereon,  it  should  every- 
where be  held  that  the  lien  of  the  bank  is  superior 
to  the  rights  of  the  holder  of  the  trust  receipt. 
Where,  however,  the  lien  is  claimed  as  security  for 
an  existing  obligation,  it  should  prevail  as  against 
a  holder  of  a  trust  receipt  only  if  a  pledge  of  the 
goods  themselves  as  security  for  a  past  obligation 
(whether  as  yet  due  or  not)  would  be  upheld.*' 

Where,  however,  the  deposit  is  made  with  knowl- 
edge on  the  part  of  the  bank  that  the  money  in  fact 
belongs  to  the  holder  of  a  trust  receipt,  it  should 
be  treated  as  a  special  deposit,  since  in  that  case 
the  bank  is  not  a  bona  fide  taker.** 


^Jordan  v.  National  Shoe  &  Leather  Bk,  (1878)  74  N.  Y.  467. 

^Meyers  v.  New  York  Co.  Nat,  Bk.,  supra,  footnote  40;  Hatch 
V.  National  Bk.   (1895)   147  N.  Y.   184,  41   N.   E.   403. 

^Drexel  v.  Pease  (1892)   133  N.  Y.  129,  30  N.   E.  732. 

^Lowery  v.  Steward  (1862)  25  N.  Y.  239;  Heidetbach  v.  National 
Park  Bk,   (1895)  87  Hun  117.  33  N.  Y.  Supp.   794.     The  signer  of 

78 


If  knowledge  of  the  rights  of  the  holder  of  the 
trust  receipt  came  to  the  bank  at  a  time  subsequent 
to  the  deposit  where  it  is  already  claiming  its  lien 
under  proper  circumstances,  the  acquisition  of  such 
knowledge  cannot  impair  its  rights,  since  its 
equitable  position  has  already  been  established.** 
It  would  be  unsafe,  however,  to  say  with  respect  to 
the  position  of  the  bank  that  the  right  to  make  ap- 
plication of  the  deposit  to  the  payment  of  a  debt  is 
^  in  law  equivalent  to  its  having  made  such  applica- 
tion in  fact.  For  example — application  is  payment 
and  the  bank  may  retain  the  funds  actually  received 
in  payment  as  against  a  cestui  que  trust  of  whose 
interest  it  was  ignorant.  But,  prior  to  application, 
the  bank  is  in  the  position  of  a  holder  of  security 
and  if  such  security  was  given  for  an  existing  debt, 
the  bank  cannot  retain  it  as  against  the  cestui  que 
trust  after  notice  of  his  right,  nor  can  it  thereafter 
make  application  (f.  e.,  take  payment)  out  of  such 
trust  funds.  In  other  words,  actual  application 
ends  the  matter,  but  prior  to  such  application,  notice 
received  of  the  rights  of  third  persons  may,  in  cer- 
tain circumstances,  deprive  the  bank  of  its  right  to 
make  application. 


the  trust  receipt  who  has  received  the  money  proceeds  of  a  sale 
fPP^ars  to  be  a  genuine  trustee  of  such  money  for  the  benefit  of 
the  holder  of  the  trust  receipt  and  the  principles  relating  to  tracing 
trust  funds  are  entirely  applicable  to  the  situation.  First  Nat,  Bk. 
of  Auburn  v.  Eastern  Tr.  &  Banking  Co.,  supra,  footnote  32. 

**See,  however,  Meyers  v.  New  York  Co,  Nat.  Bk.,  supra,  foot- 
«ote  40,  p.  485. 

79 


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(e)  Suppose,  now,  that  the  proceeds  of  trust 
receipt  property  have  been  invested  by  the  signer 
of  the  trust  receipt  in  other  property.  Undoubted- 
ly such  proceeds  may  be  retaken  by  the  holder  of 
the  trust  receipt,  provided  they  can  be  traced  and 
identified  and  no  superior  equities  have  intervened. 
The  problem,  however,  often  presents  great  practic- 
al difficulties,  as  appears  from  the  case  of  In  re  Mid- 
ligan.^^  The  proceeds  of  trust  receipt  property  to 
the  extent  of  $4,000  were  paid  to  stockbrokers  for 
the  credit  of  the  signer  of  the  trust  receipt  in  a 
current  and  running  account,  apparently  involving 
frequent  transactions.  Later  the  customer  became 
bankrupt  and,  after  paying  off  the  claim  of  the 
broker,  the  securities  remaining  were  found  to  have 
a  value  of  $1,100.  This  was  claimed  as  the  pro- 
ceeds of  the  trust  receipt  property.  There  was  no 
evidence  as  to  the  state  of  the  account  between 
the  time  when  the  $4,000  was  paid  in  and  the  end. 
Consequently,  if  the  analogy  of  a  bank  account  and 
the  rule  of  Hdlett's  case*^  had  been  applied,  the. 
claimant  would  have  failed  for  want  of  proof.  The 
court,  however,  expressed  the  view  rather  strongly 
that  this  principle  did  not  apply  in  cases  other  than 
bank  accounts.  "The  priority  .  .  .  which  has 
sometimes  been  given  to  the  cestui  in  the  applica- 
tion of  the  cash  assets  of  a  bank  which  has  mingled 


^  Supra,  footnote  37. 
^  Supra,  footnote  36. 


the  trust  fund  with  its  own  funds,  whether  de- 
fensible or  not,  is  limited  to  the  case  of  the  cash 
assets  of  a  bank,  and  is  not  extended  to  other  kinds 
of  defaulting  trustees  or  to  other  assets  of  the 
bank.  .  .  .  This  is  not  the  case  of  a  bank 
account,  which,  as  has  been  said,  is  affected  by  a 
rather  artificial  rule."  *® 

So  far  as  the  estate  of  the  signer  of  the  trust  re- 
ceipt is  concerned,  this  is  doubtless  sound.  Any 
^  other  rule  would  result  in  giving  to  the  holder  of  the 
trust  receipt  in  effect  a  priority  out  of  the  general 
assets  without  regard  to  the  identification  of  the 
property  or  its  proceeds.^®  If,  however,  the  signer 
of  the  trust  receipt  had,  for  example,  received  cash 
in  payment  and  had  placed  this  in  his  cash  box,  and 
if  it  were  shown  that  from  that  time  there  had 
always  been  at  least  that  amount  in  the  cash  box, 
would  it  not  be  reasonable  to  apply  the  analogy  of 
the  bank  account  to  the  case  and  to  deliver  the 
amount  to  the  holder  of  the  trust  receipt?  Or,  if 
the  contents  of  the  cash  box  had  at  times  fallen  be- 
^low  the  sum,  would  it  not  be  fair  to  say  that  the 
trust  fund  had  been  depleted  only  in  part  and  that 
the  holder  of  the  trust  receipt  was  entitled  to  the 
balance?  In  such  cases,  the  rule  of  Hailetfs  case 
is  equitable  and  there  seems  no  reason  for  restricting 
its  operation  to  banks  or  bank  accounts. 


I 


80 


\ 


^  Supra,  footnote  37,   p.    719. 

^  In  re  K.  Marks  &  Co.,  supra,  footnote  8. 

81 


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(f)     Suppose  that  the  signer  of  the  trust  receipt 
has  altered  the  form,  appearance  or  value  of  the 
property  by  the  application  of  labor,  but  without 
the  addition  of  any  other  materials.    This  situation 
existed  in  the  case  of  In  re  Dreuil  &  Co.,'"  where 
100  bales  of  cotton  were  put  through  a  "pickery" 
and  turned  into  150  bales  of  cotton.    There  can  be 
no  doubt  that  the  holder  of  the  trust  receipt  retains 
his  rights  in  the  goods  as  long  as  they  can  be  iden- 
tified and  that  labor  spent  upon  them  by  the  signer 
of  the  trust  receipt  is  without  effect  of  any  sort  in 
the  way  of  impairing  the  r^hts  of  the  holder  of  the 
trust  receipt,  whether  the  labor  results  in  an  in- 
crease or  decrease  of  value.    Qn  the  other  hand,  if 
an  outsider  is  employed  to  do  the  work,  he  may  in 
many  cases  obtain  a  superior  lien  upon  the  goods 
for  the  value  of  his  services." 

(g)  Suppose  that  the  goods  are  altered  in  form, 
appearance  or  value,  by  the  addition  of  other 
materials  as  well  as  by  labor.  This  is  the  most 
common  form  of  manufacture.  In  so  far  as  the 
added  materials  come  from  the  property  of  the 
signer  of  the  trust  receipt,  they  are  mere  accretions 
and  the  resultant  product,  if  identifiable,  is  still  the 
property  of  the  holder  of  the  trust  receipt.  If  such 
new  material  and  labor  are  supplied  by  an  outsider, 


—  Supra,  footnote  25. 

82 


\ 


he  may  have  a  superior  lien  for  their  value,  after 
the  satisfaction  of  which  the  holder  of  the  trust  re- 
ceipt may  reclaim  the  goods  in  their  manufactured 
state." 

(h)  Suppose  the  manufactured  product  is  com- 
posed of  material  obtained  against  a  trust  receipt, 
held  by  A,  and  of  other  material  obtained  against 
a  trust  receipt  held  by  B,  combined  with  labor  sup- 
plied by  the  signer  of  the  trust  receipt.  It  would 
seem  to  be  clear  that  A  and  B  are  co-owners  (not 
joint  owners)  of  the  product  and  that  they  may 
divide  the  product  between  them  in  proportion  as 
their  respective  goods  have  gone  into  this  resultant. 
It  may  happen,  however,  that  the  contribution  made 
by  one  of  tiiem  cannot  be  ascertained  satisfactorily 
or  is  not  capable  of  division.'*  In  that  case,  it  would 
seem  to  be  impossible  to  allot  any  part  to  either  of 
them.  This  situation  is  analogous  to  that  presented 
by  the  second  case  covered  by  In  re  Mulligan.^^  It 
may,  however,  sometimes  be  possible  to  allot  a  share 
to  A,  based  on  his  known  contribution  and  upon  a 
computation  of  the  maximum  contribution  conceiv- 
able to  have  been  made  by  B. 

(i)  Suppose  the  goods  obtained  under  trust  re- 
ceipt are  fungible  and  have  been  mixed  with  other 
goods  belonging  to  the  signer  of  the  trust  receipt. 


"*  Brown  v.   Mcus,  Hide  Corp.,  supra,  footnote   10. 
■•See  Litchfield  v.   Ballon,  supra,   footnote  31. 
**  Supra,  footnote  37. 

83 


p--" 


t:/ 


rf.-s^sC>f; 


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m 


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May  we  not  apply  the  analogy  of  a  bank  account 
and  hold  that,  as  this  mass  has  been  consumed  by 
the  signer  of  the  trust  receipt,  he  will  be  held  to 
have  misappropriated  the  goods  of  the  holder  of  the 
trust  receipt,  only  when  and  to  the  extent  that  such 
a  conclusion  is  made  necessary  by  the  facts?     In 
other  words,  may  he  not  be  presumed  to  have  used 
his  own  goods  so  long  as  he  owned  any  share  of 
the  combined  mass?     Such  a  rule  commends  itself 
as  equitable,  but  only  to  the  extent  that  the  use  made 
of  the  goods  by  the  signer  of  the  trust  receipt  has 
been  inconsistent  with  his  obligations  thereunder." 
(j)     Suppose  fungible  goods  obtained  from  A 
against  trust  receipt  are  mingled  with  similar  goods 
similarly  obtained  from  B.     They  appear  clearly  to 
be  co-owners  of  the  mass  in  proportion  to  their 
respective  contributions.     The  problem  here  seems 
to  be  very  similar  to  those  considered  under  (c)  and 
(h).«« 

A  bond  or  insurance  is  sometimes  taken  to  secure 
the  faithful  performance  of  the  obligations  of  the 
signer  of  the  trust  receipt.  It  is  hardly  necessary  to 
remark  that  the  assured  must  show  a  strict  com- 
pliance on  his  own  part  with  the  terms  of  the  trust 
receipt."^ 

vV^S/'^nf'S^  ^f*'  ^*- J-  ^'J'H^^-**^  Q^17)   228  Mass.   152,   117 
^^,\^^'^P^^u^?^^^l\^V^  K^^r^.^ec.  &  Tr.  Co.,  supra,  footnote 

N.   £^^95  ^'  ^^'^'^  ^^^^^^   ^^^  ^-  ^-  ^^^»  52 

JJ  See  B/W^ijj^^n  V.  /\^«£;  York  Sec.  &  Tr.  Co.,  supra,  footnote  11. 

84 


< 


A  great  part  of  the  difficulty  which  bankers  have 
experienced  in  connection  with  trust  receipts  has 
been  due  to  the  failure  on  the  part  of  the  banker 
to  follow  the  transaction  or  to  make  sure  that  the 
signer  of  the  trust  receipt  lives  up  to  his  part  of  the 
arrangement.  This,  of  course,  involves  trouble,  but 
so  long  as  bankers  are  content  to  rely  on  the  honesty 
and  good  faith  of  their  customers  in  this  regard, 
they  can  hardly  expect  to  avoid  substantial  losses 
through  the  failure  of  such  customers  to  scrupu- 
lously live  up  to  such  obligations.  Such  failure  is 
as  often  due  to  the  fact  that  the  customer  does  not 
understand  those  obligations  as  it  is  to  wilful  wrong- 
doing on  his  part. 

VII 

CONCLUSIONS. 

(1)  The  only  situation  in  which  a  trust  receipt 
may  properly  be  used  is  one  in  which  the  title  of 
property  by  way  of  security  is  conveyed  to  the 
^creditor  by  an  owner  who  is  not  the  person  respon- 
sible for  the  satisfaction  of  the  obligation  which  the 
property  secures*  but  where  such  obligor  has  a  con- 
tractual or  beneficial  interest  in  the  property  sub- 
ject to  the  satisfaction  of  such  obligation.  The 
creditor  may  then  deliver  the  property  to  the  obligor 
who  has  hitherto  had  neither  title  thereto  nor  pos- 
session thereof,  against  an  appropriate  trust  receipt 

*  Quoted  In  re  Cullen,  282  Fed.  902   (D.  C.  Md.  1922.) 

85 


,  -".I 


m 


-.:^,.  ■  «..i;. .—■!_, 


The  rights  of  the  creditor  in  the  property  will  be 
protected  to  the  extent  of  the  special  trust  receipt 
doctrine.  In  practice,  the  trust  receipt  situation  ex- 
ists only  in  connection  with  advances  for  the  pur- 
chase of  goods  by  way  of  the  payment  of  drafts 
against  bill  of  lading. 

(2)  The  trust  receipt  should  never  be  used  in 
connection  with  the  redelivery  of  property  pledged 
or  mortgaged  by  the  person  signing  the  trust  re- 
ceipt. 

(3)  In  the  proper  trust  receipt  situation,  the 
creditor,  generally  a  bank  or  banker,  has  legal  title 
to  the  property  for  the  purpose  of  security.  This 
creditor  is  a  mortgagee  and  the  arrangement  is  a 
chattel  mortgage,  but  of  a  peculiar  type,  distin- 
guishable from  the  usual  chattel  mortgage  by  rea- 
son of  the  fact  that  the  obligor  has  not  prior  to  the 
arrangement  had  either  title  to  or  possession  of  the 
property  mortgaged. 

(4)  Except  in  Ohio,  Illinois,  and  perhaps  South  ^ 
Carolina  and  Virginia,  cases  so  far  decided  hold  that 
the  trust  receipt  does  not  come  within  the  provisions 
of  the  recording  acts  respecting  chattel  mortgages 
or  conditional  sales. 

(5)  In  New  York  and  Massachusetts,  where  the 
factors*  act  is  in  force,  a  bona  fide  mortgagee  or 
pledgee  for  present  value  obtains  from  the  signer  of 

86 


the  trust  receipt  a  right  superior  to  the  title  of  the 
creditor  who  holds  the  trust  receipt. 

(6)  The  adoption  of  the  Uniform  Bills  of  Lad- 
ing Act  and  the  Warehouse  Receipts  Act  by  various 
states  has  given  to  those  instruments  in  large  de- 
gree the  qualities  of  negotiable  instruments.  These 
laws  accomplish  the  results  of  the  factors'  act.  In 
those  states  which  have  adopted  the  definition  of 
"value"  as  recommended  by  the  Committee  on  Uni- 
form Legislation,  an  antecedent  debt  constitutes 
value,  and  a  bona  fide  purchaser,  pledgee  or  mort- 
gagee of  such  a  document,  regular  on  its  face  and 
from  one  to  whom  it  has  been  entrusted  by  the 
holder  of  the  trust  receipt,  obtains  a  title  superior 
to  the  rights  of  the  holder  of  the  trust  receipt. 

(7)  If  goods  themselves  are  entrusted  under 
trust  receipt,  appropriate  language  should  be  used 
to  negative  any  presumption  of  right  in  the  signer 
to  take  negotiable  warehouse  receipts  to  his  own 
order. 

(8)  Except  as  noted  in  (4),  property  delivered 
to  the  signer  of  a  trust  receipt  under  circumstances 
suitable  for  the  use  of  such  an  instrument  may,  if 
identified,  be  retaken  from  the  signer  at  any  time 
before  the  satisfaction  of  the  obligation  secured  by 
the  property.  It  may  also  be  retaken  from  his  re- 
ceiver, assignee,  trustee  in  bankruptcy  or  an  attach- 

87 


'♦I 


>i 


I 


\i 


ing  creditor.    Its  proceeds  may  likewise  be  retaken, 
provided  they  can  be  identified. 

(9)  The  unpaid  purchase  price  of  property  de- 
livered to  the  signer  against  his  trust  receipt  and  by 
him  sold  to  a  bona  fide  purchaser  may  be  recovered 
by  the  holder  of  the  trust  receipt  directly  from  such 
buyer. 

(10)  The  property  delivered  in  a  proper  case 
against  trust  receipt  may  be  recovered  by  the  holder 
of  the  trust  receipt,  prior  to  payment  of  the  obliga- 
tion secured  thereby,  from  any  person  to  whom  the 
signer  has  delivered  the  same,  unless  such  right  of 
recovery  is  cut  off  by  the  exercise  of  a  power  of 
sale,  express  or  implied,  or  statutory  provisions 
which  include  a  bona  fide  pledge  or  mortgage  within 
the  scope  of  such  power. 

(11)  The  trust  receipt  cannot  assure  to  the 
holder  thereof  any  rights  beyond  those  which  he 
would  have  had  as  the  holder  of  an  unrecorded 
chattel  mortgage,  an  equitable  pledge  or  mortgage, 
or  a  simple  contract,  if  it  is  used  in  any  case  other 
than  that  which  has  been  defined  as  a  proper  trust 
receipt  case. 

(12)  The  benefit  of  the  trust  receipt  doctrine  is 
not  dependent  upon  any  special  virtue  in  the  name 
or  the  precise  form  or  appearance  of  the  agreement. 
If  the  agreement  can  in  substance  be  shown  to  have 


been  clearly  made  between  the  parties  in  a  proper 
case,  the  legal  results  will  follow,  even  though  re- 
sort is  had  to  the  original  credit  agreement  for  the 
purpose  of  establishing  the  existence  of  the  security 
arrangement. 


Karl  T.  Frederick. 


New  York  City, 


''f/ 


*5 


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« 


Date  Due 

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